Reuters: Financial Services and Real Estate: TEXT-S&P lowers rtg on Quicksilver Resources Inc. to 'B' from 'B+'

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TEXT-S&P lowers rtg on Quicksilver Resources Inc. to 'B' from 'B+' May 8th 2012, 13:20 Tue May 8, 2012 9:20am EDT May 08 - Overview -- On April 18, 2012, Standard & Poor's Ratings Services lowered its natural gas price assumptions for 2012, 2013, and 2014. -- As a result, we are lowering the corporate credit rating on U.S. exploration and production (E&P) company Quicksilver Resources Inc. to 'B' from 'B+' and our rating on the company's senior unsecured debt to 'B-' from 'B'. -- The negative outlook reflects our expectation that the company's deteriorating credit protection measures will likely be weak for the rating category over the next 12 months. Rating Action On May 8, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating on Quicksilver Resources Inc. to 'B' from 'B+'. The outlook is negative. Rationale The downgrade primarily reflects the prospects for weaker profitability and deteriorating credit protection measures at Quicksilver following the recent revision of our natural gas pricing assumptions. We recently reduced our natural gas pricing assumptions to $2.00 per million Btu (mmBtu) from $3.00/mmBtu in 2012, to $2.75 from $3.25/mmBtu in 2013, and to $3.50 from $4.00/mmBtu in 2014 (see "Standard & Poor's Lowers Its U.S. Natural Gas Price Assumptions; Oil Price Assumptions Are Unchanged," published April 18, 2012). Natural gas constitutes about 80% of Quicksilver's total equivalent production. Although the company has hedged about 65% of this year's and 45% of next year's natural gas volumes at above market prices, we have reduced our 2012 and 2013 EBITDAX expectations given lower natural gas price realizations on the unhedged portion of Quicksilver's natural gas production. The rating action reflects our view that debt-to-EBITDAX (EBITDA before exploration expense) will increase above levels that are appropriate for the 'B+' rating category in 2012. Based on this year's capital budget of $370 million, we estimate the company's debt to EBITDAX will approach 4.9x by year-end 2012 and could exceed 6.0x at year-end 2013, up from 4.1x at the end of 2011. Our revised 'B' rating on Ft. Worth, Texas-based Quicksilver reflects the company's "vulnerable" business risk and "aggressive" financial risk. Our assessment of the company's business risk is based on its participation in the cyclical and capital-intensive E&P industry and its vulnerability to the currently weak natural gas market, given that gas accounts for about 80% of current production. The ratings also reflect the company's relatively large proven reserve base for the rating category, low cost structure, above market-priced hedges and adequate liquidity. As is the case with most E&P companies, Quicksilver's cash flows can fluctuate significantly depending on volatile oil and natural gas prices. Our revised base case assumption is for natural gas and oil prices to average $2.00/mmBtu and $85/bbl, respectively, in 2012, and $2.75/mmBtu and $80/bbl in 2013, with natural gas liquids (NGLs) at about 55% of WTI in both years. Under these pricing assumptions, many in the industry, including Quicksilver, have gas production that is uneconomic (notwithstanding hedges) when considering total costs, including operating and finding and development (F&D) costs. However, Quicksilver does benefit from favorable natural gas hedges in 2012 and 2013, helping to buoy profitability amid weak natural gas prices. The company has about 65% of this year's estimated natural gas production hedged at an average price of $5.78/mcf and about 45% of next year's estimated production hedged at an average price of $5.40/mcf. As of year-end 2011, Quicksilver's reserve base was 2.8 trillion cubic feet equivalent (tcfe), consisting of natural gas (77%) and natural gas liquids (22%), with nearly 90% located in the mature Barnett Shale in Texas and the remainder in the Rockies and Canada. Average daily production in the fourth quarter of 2011 was 412 MMcfe/d, resulting in a relatively long proven reserve life of 18 years. The company's all-in cost structure (lease operating expense production taxes; cash general and administrative expenses; and three-year average F&D costs) was $4.37/mcfe in 2011, at the lower-end of the range for its peers. However, we expect costs to increase as the company shifts to a more oil-weighted production mix. We classify Quicksilver's financial risk as aggressive, given its increasing debt and the volatility in its cash flows. We estimate the company will generate about $405 million in EBITDAX this year, based on our price deck, incorporating the company's hedges, and assuming flat production levels versus 2011. We expect debt to EBITDAX to approximate 4.9x at year-end 2012, given our projection for the company's debt balance of about $2.0 billion. We anticipate that profitability and cash flows will erode further in 2013, given lower levels of hedge protection. Some combination of asset sales, joint ventures, capital spending reductions, and equity issuance will likely be necessary to prevent further deterioration in the company's credit protection measures. The company has announced plans to form and IPO an upstream master limited partnership (MLP), through which it expects to raise up to $400 million, as well as its intention to enter into joint ventures to develop its assets in the Horn River Basin (Canada) and Permian Basin (Texas). We do not factor in any potential proceeds from the MLP or joint ventures into our model, although if implemented they could improve Quicksilver's credit measures. Liquidity We view Quicksilver's liquidity as "adequate." Key elements of Quicksilver's liquidity profile include: -- The company has availability as of Dec. 31, 2011 of $798 million under its credit facility maturing in 2016, which currently has a $1.075 billion borrowing base. -- Over the next 12 months, we expect the company to remain in compliance with the facility's financial covenants, which require Quicksilver to maintain a minimum EBITDA to cash interest expense ratio of 2.5x and a minimum current ratio of 1.0x. -- We project Quicksilver will spend $370 million on exploration and development activities in 2012 and a similar amount in 2013, with production flat in both years. At this level, we estimate sources of liquidity will exceed uses by more than 2.0x in both years. -- The company is planning to form an MLP and hopes to enter into one or more joint ventures to develop several new areas, which could further bolster liquidity. -- The company has no near-term debt maturities. Recovery analysis For the complete recovery analysis, see our recovery report on Quicksilver published Feb. 14, 2012, on RatingsDirect. Outlook The negative outlook reflects our expectations that Quicksilver's cash flows and credit metrics will deteriorate through 2012 and 2013, with debt to EBITDAX approaching the 4.9x level by year-end and potentially exceeding 6.0x by year-end 2013. Our outlook assumes no proceeds from the company's planned MLP or joint venture agreements, which could be used to reduce leverage. We could lower the rating if debt to EBITDAX increases to more than 5.25x for a sustained period, without a clear path to improvement. A positive rating action is unlikely in the near term, given our outlook for weak natural gas prices. Related Criteria And Research -- Standard & Poor's Lowers Its U.S. Natural Gas Price Assumptions; Oil Price Assumptions Are Unchanged, April 18, 2012 -- Key Credit Factors: Global Criteria For Rating The Oil And Gas Exploration And Production Industry, Jan. 20, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Downgraded To From Quicksilver Resources Inc. Corporate Credit Rating B/Negative/-- B+/Negative/-- Downgraded; Recovery Ratings Unchanged Quicksilver Resources Inc. Senior Unsecured B- B Recovery Rating 5 5 Subordinated CCC+ B- Recovery Rating 6 6 Link this Share this Digg this Email Reprints

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