Sept 17 - Overview
-- U.S. oil and gas exploration and production (E&P) company Black Elk
Energy Offshore LLC has borrowed more under its credit facility than we
anticipated, and its liquidity is very limited.
-- We are lowering our corporate credit rating to 'CCC+'.
-- The negative outlook reflects the likelihood for a downgrade if the
company is not able to improve its liquidity.
On Sept. 17, 2012, Standard & Poor's Ratings Services lowered its long-term
corporate credit ratings on Houston-based Black Elk Offshore Operations LLC
(Black Elk) to 'CCC+' from 'B-'. The outlook is negative.
We also lowered our rating on the company's senior secured notes to 'B-' from
'B'. The recovery rating on these notes is '2', indicating our expectation of
substantial (70% to 90%) recovery in the event of a default.
The ratings on Black Elk reflect our view of its "vulnerable" business risk
and "highly-leveraged" financial risk, incorporating the company's small
reserve and production base, high operating costs, and acquisitive growth
strategy. The company is geographically concentrated in the Gulf of Mexico
region, and operates in a highly cyclical, capital-intensive, and competitive
We view Black Elk's reserve and production base as small relative to many of
its E&P peers. As of year-end 2011, proved reserves were about 45.2 million
barrels of oil equivalent (mmboe), 60% natural gas, and nearly 57% proved
developed. These reserves are concentrated in the shallow-water Gulf of
Mexico, which Standard & Poor's views as a challenging region due its
typically steep decline curves, and resulting high reinvestment requirements
to maintain reserve and production levels. The company has made five
significant acquisitions since the fourth quarter of 2009 to replace and
increase production and reserves. As of year-end 2011, Black Elk had a proved
developed reserve life of less than five years, which we view as short.
Black Elk also has a relatively high cost structure, with cash operating costs
(lease operating expenses, workover expense, production taxes, and general and
administrative expenses) of about $38 per boe. With depreciation, depletion,
and amortization at $8.57 per boe, Black Elk's all-in unlevered cost is about
$46.14 per boe or $7.69 per mcfe for the first half of 2012. To buffer itself
from higher costs and provide cash flow stability, we expect Black Elk will
continue to hedge a material amount of its projected production.
Based on our crude oil and natural gas price assumptions ($85 per barrel of
oil in 2012 and $80 in 2013 and $2.50 per thousand cubic feet (Mcf) natural
gas in 2012 and $3.00 per mcf in 2013), we forecast that Black Elk will
generate between $75 million to $100 million of EBITDA over the next 12
months, and have debt of about $270 million, including standard analytical
adjustments. Under these assumptions the company's adjusted debt leverage will
be about 3.0x debt to EBITDA. We forecast funds from operations (FFO) of
approximately $50 million, which is not adequate to fund projected capital
expenditures of $40 million over the next 12 months, and escrow funding of
approximately $30 million. Operating cash flows will benefit from Black Elk's
exposure to crude oil, which should be about 40% of production, and because
oil on the Gulf Coast receives a premium to NYMEX benchmark pricing.
In our assessment, the company has "weak" sources of liquidity, reflecting the
following expectations and assumptions:
-- We believe expected sources of liquidity will cover expected uses of
liquidity by less than 1.2x over the next 12 months.
-- As of Aug. 7, 2012, Black Elk had about $7 million available under its
$70 million revolving credit facility that matures in December 2013 and about
$17 million in cash. Black Elk also maintains a $125 million facility to
support letters of credit relating to plugging and abandonment activities.
-- We expect the company will generate insufficient operating cash flow
to cover its anticipated capital expenditures and escrow requirements for
asset retirement obligations.
-- Black Elk's covenants limit it to a maximum leverage ratio of 2.5x, a
minimum interest coverage ratio of 3x, minimum SEC PV-10 to consolidated
leverage ratio of 1.4x, and a maximum capital spending program not to exceed
30% of the prior year's EBITDAX.
For the complete recovery analysis, see Standard & Poor's recovery report on
Black Elk to be published on RatingsDirect after this release.
The negative outlook reflects the potential for Black Elk's liquidity to
deteriorate further. We would consider a negative rating action if the company
faces additional weakening of its liquidity resulting from failure to curtail
capital spending, operational problems that reduce production, or materially
lower crude oil prices. We would consider a positive rating action if the
company is able to improve liquidity to about $40 million while maintaining
production. Given its current low level, the company's leverage is not an
impediment to positive rating actions.
Related Criteria And Research
-- Key Credit Factors: Global Criteria For Rating The Oil And Gas
Exploration And Production Industry, Jan. 20, 2012
-- Standard & Poor's Raises Its U. S. Natural Gas Price Assumptions; Oil
Price Assumptions Are Unchanged, July 24, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Our Rating Process, April 15, 2008
Downgraded; Outlook Negative
Black Elk Energy Offshore Operations LLC
Corporate Credit Rating CCC+/Negative/-- B-/Stable/--
Black Elk Energy Offshore Operations LLC
Black Elk Energy Finance Corp.
Senior Secured B- B
Recovery Rating 2 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