Reuters: Mergers News: TEXT-S&P rates EP Energy LLC 'BB-'

Reuters: Mergers News Reuters.com is your source for breaking news, business, financial and investing news, including personal finance and stocks. Reuters is the leading global provider of news, financial information and technology solutions to the world's media, financial institutions, businesses and individuals. // via fulltextrssfeed.com

TEXT-S&P rates EP Energy LLC 'BB-' Jun 8th 2012, 15:00 Fri Jun 8, 2012 11:00am EDT Overview -- U.S.-based oil and gas exploration and production (E&P) company EP Energy LLC has completed the acquisition of El Paso Corp.'s E&P subsidiary for $7.15 billion, funded with a combination of debt and equity. -- We are assigning a 'BB-' corporate credit rating to EP Energy LLC, a 'BB-' issue rating to the senior secured notes and term loan, and a 'B' issue rating to the senior unsecured notes. -- The outlook is stable, reflecting the company's solid hedging position in 2012, adequate liquidity, and its ongoing shift to higher-margin oil production. Rating Action On June 8, 2012, Standard & Poor's Ratings Services assigned its 'BB-' corporate credit rating to Houston-based EP Energy LLC (formerly Everest Acquisition LLC). The outlook is stable. We also assigned a 'BB-' issue rating to EP Energy's $750 million senior secured notes due 2019 and its $750 million term loan maturing in 2018. We assigned this debt a '4' recovery rating, indicating our expectations of average (30% to 50%) recovery in the event of a payment default. We also assigned a 'B' issue rating to EP Energy's $2.0 billion senior unsecured notes due 2020. The recovery rating on these notes is '6', indicating our expectations of negligible (0% to 10%) recovery in the event of a payment default. The company used proceeds from the debt offering to partially fund the $7.15 billion acquisition of El Paso Corp.'s (BB/Stable/--) exploration and production subsidiary by Apollo Global Management LLC, Riverstone Holdings LLC, Access Industries Inc., Korea National Oil Corp., and other investors. Rationale The ratings on EP Energy LLC reflect our assessment of the company's "fair" business risk and "aggressive" financial risk. The ratings incorporate the company's medium size and scale; its meaningful exposure to natural gas (70% of proven reserves and about 85% of 2011 production); its relatively high leverage compared with peers; and its position in a highly cyclical, capital-intensive, and competitive industry. The ratings also reflect the company's good hedging position (equivalent to 70% of last year's natural gas production in 2012 and 30% in 2013), "adequate" liquidity, and its ongoing shift to oil production. Standard & Poor's views EP Energy's business profile as fair given its medium size, strong reserve replacement metrics, high proportion of natural gas reserves, and relatively high proportion of proved undeveloped reserves that require additional spending to bring to production. EP Energy's proven reserve base at year-end 2011 was nearly 4.0 trillion cubic feet equivalent--70% natural gas, and 51% proved developed. The company has replaced nearly 300% of its production, on average, over the past three years, largely because of growth in the dry gas Haynesville shale. The Haynesville now accounts for about one-quarter of EP Energy's proven reserves and 35% of its current production. At current natural gas prices (below $2.50 per million British thermal unit ), unhedged returns in the Haynesville shale are marginal, and EP Energy has suspended drilling activity in the play. In fact, given the pricing discrepancy between oil and natural gas, EP Energy has allocated nearly 90% of this year's $1.5 billion capital budget toward oil projects, primarily in the Altamont field (Utah), Eagle Ford shale (Texas), Wolfcamp shale (Texas), and Wilcox play (Louisiana). EP Energy allocated about 60% of the budget to the Eagle Ford shale, where the company holds 157,000 net acres and plans to drill 88 wells. Based on Standard & Poor's oil and natural gas price assumptions of $85 per barrel and $2 per mmbtu, respectively, in 2012, we project the company will spend about $1.3 billion, which should keep total production essentially flat with 2011. However, we expect oil production to increase as a percentage of total volumes in 2012. EP Energy's cost structure is in line with the other onshore natural gas-weighted companies in its rating category. We estimate all-in costs (defined as cash operating costs plus three-year average finding and development costs) at about $3.6 per million cubic feet equivalent (mcfe) (versus about $2.5 to $5 per mcfe for its peers). Cash operating costs (lease operating expense, production taxes, and cash general and administrative expense) were competitive at just under $2 per mcfe, while three-year average finding and development costs were about $1.6 per mcfe. Going forward, we expect all-in costs to increase as the company shifts to oil production, but the higher revenues from oil should more than offset cost increases. We view EP Energy's financial risk as aggressive, reflecting its above-average debt leverage and our estimate that the company will outspend funds from operations (FFO) in 2012. Based on Standard & Poor's price assumptions for oil and natural gas of $85 per barrel and $2 per mmbtu, respectively, in 2012, and incorporating the company's favorable hedges, we project 2012 EBITDAX of $1.2 billion and FFO of $850 million. We estimate that EP Energy will outspend FFO by nearly $450 million in 2012, but we believe that liquidity will be more than sufficient to fund this gap. We estimate EP Energy's total debt at about $4.4 billion, including our adjustments for future abandonment liabilities and operating leases, resulting in about a 3.5x debt to EBITDAX ratio on a trailing-12-month basis. We forecast total debt to EBITDAX will approach 3.8x at year-end 2012, which is at the upper end of our expected range for the rating category, and drop to 3.6x at year-end 2013 as the company shifts to a greater proportion of oil production. Liquidity We view EP Energy's liquidity as adequate. Key elements of Everest's liquidity profile include: -- EP Energy has availability of about $1.25 billion on a $2.0 billion reserve-based revolving credit facility maturing in 2017. -- Over the next 12 to 24 months, we expect the company to remain in compliance with the facility's financial covenant, which requires EP Energy to maintain a debt to EBITDAX ratio of less than 5.0x through June 30, 2013, and less than 4.75x through June 30, 2014. -- We project the company will outspend FFO by $450 million in 2012 and to fund this gap by drawing down the credit facility. -- The company has no near-term debt maturities. Recovery analysis For the complete recovery analysis, see Standard & Poor's recovery report on EP Energy, to be published later on RatingsDirect. Outlook The stable outlook reflects EP Energy's strong natural gas hedge position for 2012, adequate liquidity, and the growing proportion of oil in its production mix. Near-term positive rating actions are unlikely given the company's relatively high debt leverage for the rating category and its exposure to weak natural gas prices. We could lower the rating if EP Energy's debt to EBITDAX ratio exceeds 4.0x for a sustained period, which would most likely occur if oil production does not ramp up as much as we anticipate or if natural gas prices decline further in 2013. Related Criteria And Research -- Standard & Poor's Lowers Its U.S. Natural Gas Price Assumptions; Oil Price Assumptions Are Unchanged, April 18, 2012 -- Everest Acquisition LLC Preliminary Senior Secured Issue Rtgs Cut To 'BB-' From 'BB'; Recovery Rtg Revised To '4' From '2', April 10, 2012 -- Everest Acquisition LLC Assigned 'BB-' Preliminary Rating; Assigned Preliminary Issue Ratings; Outlook Stable, April 3, 2012 -- Standard & Poor's Raises Its Oil Price Assumptions; Natural Gas Price Assumptions Unchanged, March 22, 2012 -- Key Credit Factors: Global Criteria For Rating The Oil And Gas Exploration And Production Industry, Jan. 20, 2012 Ratings List New Rating; Outlook Action EP Energy LLC Corporate Credit Rating BB-/Stable/-- New Rating EP Energy LLC EP Energy Finance Inc. Senior Secured $750 mil notes due 2019 BB- Recovery Rating 4 Senior Secured $750 mil term loan due 2018 BB- Recovery Rating 4 Senior Unsecured $2.0 bil notes due 2020 B Recovery Rating 6 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 column. Link this Share this Digg this Email Reprints

You are receiving this email because you subscribed to this feed at blogtrottr.com. If you no longer wish to receive these emails, you can unsubscribe from this feed, or manage all your subscriptions