-- Independent U.S. oil and gas exploration and production (E&P) company
and master limited partnership (MLP) Atlas Resource Partners L.P. (Atlas) is
planning to issue $250 million of senior unsecured notes.
-- We are assigning a 'B' corporate credit rating to the company. We are
assigning a 'B-' issue rating and '5' recovery rating to Atlas' proposed $250
million senior unsecured notes due 2021.
-- The stable outlook reflects our expectation that Atlas' leverage will
remain moderate, providing a mitigant to the risks that are associated with
the E&P MLP structure and its high weighting to natural gas.
On Jan. 10, 2013, Standard & Poor's Ratings Services assigned its 'B'
corporate credit rating to Philadelphia, Pa.-based Atlas Resource Partners
L.P. The outlook is stable.
At the same time, we assigned our 'B-' issue rating (one notch lower than the
corporate credit rating) to Atlas Resource Finance Corp. and Atlas Energy
Holdings Operating Co. LLC's proposed $250 million senior unsecured notes due
2021. We also assigned a '5' recovery rating to the notes, indicating our
expectation of modest (10% to 30%) recovery in the event of a payment default.
The two companies are subsidiaries of Atlas, and the company will use proceeds
from the transaction to fund repayment of existing debts and for general
The ratings on Atlas reflect its small, predominantly natural gas reserve and
production base, sizable distributions to unit-holders under its structure as
a master limited partnership and limited reserve replacement history. The
ratings also reflect the volatility and capital intensive nature of the oil
and gas industry. These weaknesses are adequately offset at the rating level
by moderate debt leverage, relatively low operating risk related to multiple
onshore U.S. basins, and a willingness to use equity to fund acquisitions.
Standard & Poor's characterizes Atlas' business risk profile as "vulnerable",
its financial risk profile as "aggressive" and its liquidity as "adequate".
Following multiple acquisitions completed in 2012, Atlas has approximately 898
billion cubic feet of natural gas equivalent (bcfe) of proved reserves and
daily production of approximately 132 million cubic feet of gas equivalent
(mmcfe), which is comparable with similarly rated peers. Natural gas accounts
for 81% of reserves which we view as relatively unfavorable because of the
lackluster gas price outlook, and 51% are categorized as proved-developed, the
least risky category. Atlas' historical operating costs (lease operating
expense, production tax and transportation) were relatively low at $1.19 per
thousand cubic feet of gas equivalent (mcfe) in the first nine months of 2012,
reflecting gas-weighted production concentrated in the prolific Barnett shale
formation. We expect costs to improve as the company adds new production and
that its reserve replacement will be adequate as the company develops its
extensive sizable proved-undeveloped reserves. We view Atlas' partnership
management business, through which it drills and manages wells on behalf of
investors, as improving profitability and providing an attractive source of
Atlas derives about 54% of its pro forma production from the Barnett shale and
Marble Falls formations in the Ft. Worth Basin (Texas), where the company has
a sizable acreage position. Remaining pro forma production comes mainly from
Appalachia, including Marcellus shale wells. Atlas also has acreage covering
the Mississippi Lime formation in Oklahoma and Utica shale in Ohio. We expect
the company to focus in the near term on increasing oil and natural gas
liquids production through relatively low risk development of Ft. Worth Basin
properties and drilling more prospective wells in the Mississippi Lime and
The financial risk profile is aggressive, driven primarily by Atlas' status as
an MLP, which creates an incentive to maintain and increase distributions to
unit-holders. We note Atlas' willingness to issue equity to fund acquisitions
favorably, but view distributions as a relatively inflexible demand on cash
flow. Debt leverage is moderate for the rating at 3.4x debt to EBITDA, pro
forma for 2012 acquisitions. Debt for this calculation includes Standard &
Poor's typical adjustments. We expect debt leverage to decline to about 3.1x
at the end of 2013.
At our price deck, (which for West Texas Intermediate (WTI) oil is $80 in 2013
and $75 in 2014 and thereafter and for natural gas is $3.00 in 2013, and $3.50
in 2014 and thereafter), we think Atlas will generate approximately $150
million funds from operations (FFO) in 2013, benefiting from increased
production and cost reduction. Assumed 2013 capital expenditures of $170
million and unit-holder distributions of approximately $100 million will
exceed internally generated cash flow, with the difference funded with credit
facility borrowings. Atlas will have approximately $300 million available
under its credit facility pro forma for 2012 acquisitions and the notes
issuance. The borrowing base was raised to $410 million in December; we expect
it to be reduced to about $380 million following the notes issuance. Atlas has
a significant portion of its expected production hedged through 2017,
providing meaningful cashflow protection.
We characterize Atlas' liquidity as adequate. Our assessment incorporates the
following expectations and assumptions:
-- We project that 2013 funds from operations will approximate $150
-- We assume a 2013 capital budget for the company of about $170 million;
-- We assume distributions to unit-holders of approximately $100 million
-- We expect the company to have a borrowing base of approximately $380
million with $300 million available pro forma for 2012 acquisitions and the
proposed notes issuance.
-- We expect that Atlas will fund its 2013 cash flow deficit of
approximately $120 million with borrowings under the credit facility.
-- We view management's strong track record of attracting investment
partnership funding and issuing equity as favorable for Atlas' liquidity.
For the full recovery analysis, please see the recovery report on Atlas to be
published on RatingsDirect following the release of this report.
The stable outlook reflects our expectation that Atlas' leverage will remain
moderate, providing a mitigant to the risks that are associated with the E&P
MLP structure and its high weighting to natural gas. We would consider a
downgrade if Atlas faces constrained liquidity, or if debt to EBITDA increases
to 4.75x. We would consider an upgrade if Atlas is able to substantially
increase reserves and production while maintaining leverage at or below 3x,
manage capital spending closer to its operating cash flows, and maintain
Temporary telephone contact number: Ben Tsocanos (203-800-5146)
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- 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
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
New Rating; Outlook Action
Atlas Resource Partners L.P.
Corporate Credit Rating B/Stable/--
Atlas Energy Holdings Operating Co. LLC
Atlas Resource Finance Corp.
US$250 mil sr unsecd nts due 2021 B-
Recovery Rating 5