-- We expect PetroBakken Energy Ltd.'s increasing production
trajectory in the Cardium play to benefit the company's cash flow; we forecast
credit measures to improve through 2013.
-- We are revising our outlook on PetroBakken to positive from stable.
-- We are also affirming our 'B' long-term corporate credit rating on the
-- The issue and recovery ratings on PetroBakken's unsecured notes are
unchanged at 'CCC+' and '6', respectively.
-- The positive outlook reflects our expectation that PetroBakken will
continue increasing production and cash flow while maintaining its
balance-sheet strength and liquidity through 2013.
On Aug. 24, 2012, Standard & Poor's Ratings Services revised the outlook on
Calgary, Alta.-based independent oil and gas exploration and production (E&P)
company PetroBakken Energy Ltd. to positive from stable. At the same time,
Standard & Poor's affirmed its 'B' long-term corporate credit rating on the
company. The issue and recovery ratings on PetroBakken's unsecured notes
remain unchanged at 'CCC+' and '6', respectively.
The outlook revision reflects our expectation that PetroBakken's increasing
production trajectory from its Cardium play and associated cash flow will
strengthen the company's credit measures. This improvement, if sustained,
positions the company for an upgrade in the very near term. We also believe
that PetroBakken's strong liquidity, through a combination of improved cash
flows, asset sales and lower cash dividends, will enable it to focus on its
growth strategy through 2013. Before, we had forecast the company's production
growth and associated cash flow to be weaker (about 10%) and liquidity to be
less than adequate.
The ratings on PetroBakken reflect what Standard & Poor's view of the
company's "weak" business risk profile and "aggressive" financial risk
profile. The ratings also reflect our view of PetroBakken's operations in a
highly cyclical, capital-intensive, and competitive industry; its elevated
all-in costs, due to its high finding, development, and acquisition (FD&A)
costs; and management's aggressive financial policy. We believe the strengths
associated with large exposure to light oil, which improves profitability, and
Cardium growth prospect offsets these weaknesses somewhat.
PetroBakken is a midsize E&P company that operates mostly in western Canada.
About 80% of the company's reserves and production are from the Bakken and
Cardium plays, the company's key operating areas. As of June 30, 2012,
PetroBakken will have about C$1.74 billion in adjusted debt (adjustments
include operating leases [C$51 million] and asset-retirement obligations
The company's weak business risk profile reflects our view of the highly
competitive and capital intensive E&P industry and PetroBakken's high all-in
costs, which the elevated crude prices that are supporting the company's
profitability and Cardium growth prospect offset somewhat. 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
are generated. The level of profitability also depends heavily on the cost of
finding and extracting oil. Currently, E&P companies are benefiting from high
oil prices; however, over the long term, the risk remains that oil prices
could decline, hurting companies that have high cost bases and high
maintenance capex requirements.
We believe PetroBakken's all-in costs are high due to its high FD&A cost. The
three-year average all-in FD&A costs of about C$37 per barrel of oil
equivalent (boe) are among the least competitive of the peer group. However,
we expect the company's cash cost structure to remain competitive, with cash
operating costs (production expenses, transportation, and general and
administrative) at about C$16.50 per boe. Therefore, PetroBakken's full-cycle
costs (combination of cash operating costs, FD&A costs, and interest expenses)
is an elevated C$52 per boe, which is high when compared with those of its
Canadian and U.S. peers. The company, however, has realized some improvement
in its unit FD&A costs through 2011, and based on our expectation of continued
growth in Cardium, we expect its full-cycle cost profile to lower
(C$3.00-C$7.00 per boe) during the next 24 months.
Despite its high all-in cost structure, we believe PetroBakken will continue
to generate strong profitability at Standard & Poor's commodity price
assumptions. We expect the company to continue to maintain its exposure to
liquids (about 85%) through a combination of crude and natural gas liquids
production. Natural gas prices in North America, which has remained depressed,
will have limited affect on PetroBakken's cash flow; we expect the company
will limit its gas exposure to 15-20% of its production through 2013. Despite
the negative pressure on Canadian crude compared to West Texas Intermediate
(WTI) prices (due to infrastructure constraints in transporting crude) in
second-quarter 2012 and which we expect to continue through 2013, we are
comfortable with PetroBakken's ability to generate positive cash flow at our
We expect the Cardium play to be a driving factor in PetroBakken's growth
during our forecast period; we project the company to improve its 2013 cash
flow as it achieves its production growth. Its operations focus mostly in two
resource plays--the Cardium and the Bakken, which together account for about
85% of the capex budget. The free cash flow from Bakken, a mature play, helps
finance the Cardium operations. Because PetroBakken has executed its strategy
to increase production from Cardium, and because we project for production to
continue rising, we expect the company to increase cash flow and profitability
We believe PetroBakken's aggressive financial risk profile reflects the
company's high fixed charges and management's aggressive financial policy. We
expect that management will continue to fund its cash flow shortfall through
debt financing as it has done since 2010; we do not expect them to issue
equity. At June 30, 2012, the company's credit measures are better than our
guidelines for an aggressive financial risk profile (total adjusted
debt-to-EBITDA of 2.2x and total adjusted funds from operations -to-debt
of 40%), emphasizing the current high of the cycle price environment. However,
taking into account the E&P industry's capital-intensive nature and the
company's fixed charges, PetroBakken's 2012 (FFO minus maintenance capex and
cash dividends)-to-debt drops to 0%-5%; maintenance capex is about C$500
million. If we exclude cash dividends, FFO minus maintenance capex-to-debt
remains at 10%-15%, which we believe is weak. Supplementary ratios that we
also focus on for the E&P industry are debt per boe of proved reserves--the
company's debt numbers are at about C$14 per boe of proven reserves, which is
high compared with that of its 'B' category peers.
Under our latest price scenario (for more information, see "Standard & Poor's
Raises Its U.S. Natural Gas Price Assumptions; Oil Price Assumptions Are
Unchanged," published July 24, 2012, on RatingsDirect on the Global Credit
Portal), and assuming the current correlations between WTI prices and realized
prices hold, Standard & Poor's expects PetroBakken to generate EBITDAX of
C$650 million-C$700 million in 2012 and C$750 million-C$800 million for 2013.
We expect the company to end 2013 with its debt-to-EBITDA near 3x and
(FFO-maintenance capex)-to-debt of 0%-5%. Our assumptions include the
-- Standard & Poor's WTI price assumptions are US$85 per boe for 2012,
US$80 for 2013, and US$75 for 2014; Henry Hub gas price assumptions are $2.50
per million BTU for 2012, $3.00 for 2013, and $3.50 for 2014.
-- Production in 2012 and 2013 will increase 8%-12% on average annually
with gas remaining about 15%-20% of total production.
-- Unit full-cycle costs for 2012 will be unchanged from 2011 levels,
while 2013 will show some improvement.
-- Fixed costs for 2012 include C$875 million in capex and about C$75
million in cash dividends. We forecast 2013 capex at C$700 million-C$750
million at our price assumptions.
-- We expect that the company will fund its cash flow shortfall with
borrowings under the revolver.
-- We assume that the company will settle its US$300 million of 3.125%
senior convertible bonds in cash in February 2013.
We believe PetroBakken has strong liquidity to cover its needs in the next 18
months. Our assessment of the company's liquidity profile incorporates the
following expectations and assumptions:
-- We expect PetroBakken's sources of liquidity--for instance, FFO and
availability under its bank facility --to exceed its uses 1.2x during the next
-- We expect the company to fund its uses even if EBITDA dropped 30%, due
to a drop in hydrocarbon prices.
-- With the dividend reinvestment program's introduction, cash dividend
payments for 2012 will be about C$75 million, compared with C$180 million in
-- The company has adequate flexibility in its capital program to reduce
it to its maintenance capital expenditure of C$500 million, to preserve
PetroBakken had about C$1.1 billion available under its C$1.4 billion
revolving facility as of June 30, 2012. The credit facility, unlike that of
other E&P companies, is not a borrowing base facility. So during periods of
weak commodity prices PetroBakken will still have access to its full facility,
unlike other E&P companies whose borrowing base might fall.
The revolving facility has multiple financial covenants--3x secured
debt-to-EBITDA, 4x total debt-to-EBITDA, and a secured debt limit of 50% of
total liabilities plus total equity. The company has plenty of room (about 55%
under its tightest covenants) under its covenants; we do not expect it to
breach its covenants in the next 12-24 months.
We rate PetroBakken's US$900 million senior unsecured notes due 2020 'CCC+'
(two notches below the corporate credit rating on the company), with a
recovery rating of '6', indicating our expectation of negligible (0%-10%)
recovery in the event of a default.
The positive outlook reflects Standard & Poor's expectation that PetroBakken's
positive production trajectory and stronger cash flows positions it for an
upgrade in the next 12 months. We also expect the company to improve its unit
FD&A costs as it adds organic, drill-bit-related reserves during our forecast
period. Our forecasts assume that the company will not generate any cash flow
after funding its capital expenditures and dividends through 2013 and that the
remaining convertible notes outstanding will be settled in cash in February
We will likely upgrade the ratings if PetroBakken maintains its production
growth, mainly in Cardium; and demonstrate improved FD&A costs, which would
likely lower the company's cost profile. We assume PetroBakken will maintain
its balance-sheet profile and strong liquidity through this period.
We would consider a downgrade if PetroBakken cannot achieve its expected
production growth, its full-cyle costs increase above current reported levels
due to operating problems, or commodity prices drop (for instance, oil prices
fall below US$65 a barrel) such that fully adjusted debt/EBITDA would rise and
stay above 4.5x. Also, aggressive financing of growth initiatives, either
acquisition or capital expenditures, that significantly increase leverage
above 4.5x without prospects for rapid deleveraging would lead us to revisit
Related Criteria And Research
-- 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
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
PetroBakken Energy Ltd.
Outlook Revised To Positive
Corporate credit rating B/Positive/-- B/Stable/--
Rating/Recovery Rating Unchanged
Senior unsecured debt CCC+
Recovery rating 6