BRIEF-Government Properties Income Trust prices offering of 25 mln common shares
* Government Properties Income Trust prices offering of 25,000,000 common shares
Overview -- U.S. oil and gas exploration and production company Denbury Resources Inc. is acquiring properties in Montana's Cedar Creek Anticline from ConocoPhillips for $1.05 billion in cash. -- We are revising our outlook to stable and are affirming all our ratings, including the 'BB' corporate credit rating. -- We are assigning a 'BB' rating to Denbury's proposed $1 billion senior subordinated notes offering due 2023. -- The stable outlook incorporates our expectation that under our current operating assumptions leverage will not exceed 3.5x. Rating Action On Jan. 22, 2013, Standard & Poor's Ratings Services revised its outlook on Plano, Texas-based Denbury Resources Inc. (Denbury) to stable from positive and affirmed its ratings, including the 'BB' corporate credit rating, on the company. We also assigned a 'BB' issue rating (the same as the corporate credit rating) to Denbury's proposed $1 billion senior subordinated notes issue due 2023. Our recovery rating on Denbury's senior subordinated notes remains '3', indicating our expectation of meaningful recovery in the event of a payment default. Denbury is using proceeds from this offering to refinance existing debt. Rationale We are revising the outlook to stable from positive to reflect Denbury's higher debt balance following the company's $1.05 billion acquisition of Cedar Creek Anticline reserves from ConocoPhillips. Denbury is funding the Cedar Creek acquisition with proceeds from the recent sale of its holdings in the Bakken basin. Our previous expectation was that Denbury would use a portion of its $1.3 billion cash proceeds from the Bakken sale to help fund its very aggressive spending program over the next several years. At the same time, tertiary recovery infrastructure to transport carbon dioxide to Cedar Creek is capital intensive and will require several years to build. This means that Denbury's outspending of internal cash flows is likely to be larger than our previous assumptions. We think that Denbury will use its credit facility to fund this outspending, adding to projected leverage. Under our current operating assumption, we expect Denbury to post leverage, as measured by debt-to-EBITDA, in the low-to mid-3x area, which is aggressive. Our ratings on Denbury, an independent E&P company, reflect the capital-intensive and high operating costs of its tertiary oil operations, its aggressive capital spending program, and negative free cash flow expectations for the next several years. The ratings incorporate our "aggressive" financial risk, "fair" business risk, and "adequate" liquidity assessments. The ratings also reflect the company's significant production of high-priced oil and its relatively low-risk exploitation strategy. Denbury's "aggressive" financial risk profile reflects its Sept. 30, 2012, debt balance of approximately $3.3 billion, including operating leases and asset retirement obligations (AROs), pro forma for the proposed $1 billion note issue and pay down of approximately $650 million of its 2016 notes. We forecast that EBITDA will total slightly more than $1 billion in 2013 and nearly $1.2 billion in 2014. We project that funds from operations (FFO) will be approximately $725 million this year and more than $800 million in 2014. We also project that the company will outspend internally generated cash flow by more than $300 million in 2013 and nearly $500 million in 2014 based on capital spending levels of $1.1 billion this year and our forecast for $1.3 billion next year. However, in a lower hydrocarbon pricing environment, we think that Denbury has flexibility to cut its capital spending program and that due to the tertiary nature of operations it would have little impact to our production forecasts. Under our current operating assumptions, we would expect Denbury to fund its free cash flow deficit through its revolving credit facility. We based our projections on the following expectations and assumptions: -- Pro forma for Cedar Creek production beginning in second-quarter 2013, we project that production will be approximately 70 thousand barrels of oil equivalent per day (MBoe/d) this year and about 80MBoe/d in 2014. -- Standard & Poor's currently uses a price assumption for West Texas Intermediate oil (WTI) of $80/bbl in 2013 and $75/bbl thereafter. We have assumed a $5/bbl positive differential for oil this year and next year, given the company's exposure to Louisiana Light Sweet (LLS) prices in the Gulf Coast. Our assumption for Henry Hub natural gas is $3/Mcf in 2013 and $3.50/Mcf thereafter. -- We project that oil, which has healthy price realizations, will constitute more than 90% of production. The company has hedged about 80% of our forecasted daily production in 2013 and about two-thirds of forecasted daily production in 2014 (no hedges on gas production) at a floor price of $80/bbl. We consider Denbury's business risk profile to be "fair". Its midsize proved reserve base is in line with other exploration and production companies in the 'BB' rating category, totaling more than 400 million barrels of oil equivalent (MMBoe) at year-end 2011, pro forma for its Bakken asset sale and acquisitions of Cedar Creek Anticline, Webster, and Hartzog Draw fields. Benefiting the business profile, the reserve base consists of approximately 75% oil, which is currently enjoying healthy realizations, which we believe has relatively favorable pricing prospects compared with North American natural gas. Following its Cedar Creek acquisition, we expect the company's daily production to represent approximately 70MBoe/d this year, which we believe is in-line with its 'BB' rated peer group. The company's core exploitation strategy focuses on tertiary oil recovery (a strategy that uses carbon dioxide to flood mature wells), which reduces exploration risk but carries higher operating costs and investment requirements, resulting in a higher break-even threshold. Due to the company's tertiary recovery, cash costs (sum of lease operating costs, taxes, and cash general and administration expenses) are well above similarly rated peers (about $30/Boe in third-quarter 2012 compared with less than $20/Boe). Approximately $20/Boe of Denbury's costs relate to lease operating expense (LOE), which incorporates the use of carbon dioxide in tertiary recovery. Carbon dioxide and oil prices are highly correlated, so LOE movements will closely track those of oil. Profitability measures could lag more oil-weighted peers given the long lead time of its tertiary operations, especially if the Gulf Coast's positive crude oil differential weakens, but should still significantly outperform companies with greater exposure to natural gas and NGLs. Liquidity We consider Denbury's liquidity profile to be adequate. Our assessment of the liquidity profile incorporates the following expectations and assumptions: -- As of Sept. 30, 2012, the company had approximately $24 million of cash on the balance sheet and nearly $1 billion of availability on its $1.6 billion borrowing base maturing in 2016. We assume that Denbury will use about $300 million of proceeds from its proposed $1 billion note issue to pay down borrowings on its revolver, taking pro forma availability to about $1.3 billion. -- We forecast that sources of liquidity (including undrawn commitments on its credit facility, FFO, and cash on hand) will exceed uses (including capital spending, share repurchases, and debt maturities) by more than 1.2x over the next 12 months and that sources would be greater than uses even if EBITDA falls by more than 15%. -- We have assumed no further acquisitions or divestitures over the next 12 months in our liquidity assessment. -- Benefiting the liquidity assessment, we think that Denbury could cut its capital spending in a lower hydrocarbon environment with little impact to production. Outlook The outlook is stable to reflect the expectation under our current operating assumptions that we are unlikely to raise or lower the corporate credit rating over the next 12 months. However, we could still lower the rating if Denbury posts weaker production or profitability than current expectations. We could also lower the rating if its spending program results in more aggressive leverage measures than we currently contemplate. We consider leverage below 3.5x to be necessary to maintain a 'BB' rating. We consider an upgrade to be unlikely, given our expectation that Denbury will continue to rely on debt to fund its aggressive growth plans. Related Criteria And Research -- Standard & Poor's Raises Its U.S. Natural Gas Price Assumptions; Oil Price Assumptions Are Unchanged, July 24, 2012 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From Denbury Resources Inc. Corporate Credit Rating BB/Stable/-- BB/Positive/-- New Rating Denbury Resources Inc. Subordinated US$1 bil sr sub nts due 2023 BB Recovery Rating 3 Ratings Affirmed Denbury Resources Inc. Subordinated US$400 mil 6.375% sr nts due BB 08/15/2021 Recovery Rating 3 US$1 bil 8.25% sr sub nts due BB 02/15/2020 Recovery Rating 3 US$225 mil 7.50% sr sub nts due BB 04/01/2014 Recovery Rating 3 US$420 mil 9.75% sr sub nts due BB 03/01/2016 Recovery Rating 3 Encore Acquisition Co. Subordinated Local Currency BB Recovery Rating 3 3
* Government Properties Income Trust prices offering of 25,000,000 common shares
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