QEP Resources Inc. Downgraded To 'BB-' On Asset Sale; Ratings Remain On CreditWatch Negative

  • U.S.-based oil and gas company QEP Resources Inc. announced it has closed the sale of its Haynesville and Cotton Valley assets to Aethon III (not rated) for $735 million.
  • We expect the company to use the proceeds to pay down their revolving credit facility, as well as fund a portion of their 2019 capital expenditure program.
  • The sale reduces the scale of QEP's operations, asset diversity, and product mix.
  • Expected financial measures have weakened following the recent reduction in our expected West Texas Intermediate (WTI) crude oil price assumptions.
  • On January 11th 2019, we lowered the issuer credit and senior unsecured ratings to 'BB-' from 'BB'.
  • The ratings on QEP remain on CreditWatch with negative implications, reflecting the potential to lower ratings further following the sale of its Williston Basin assets if proceeds do not adequately address upcoming debt maturities, or we view the resulting scale and asset diversity, including expectations for growth, as inconsistent with the current rating.
CENTENNIAL (S&P Global Ratings) Jan. 11, 2019--S&P Global Ratings today took 
the rating actions listed above. The downgrade reflects our assessment of 
QEP's smaller scale of operations as well as more limited asset and product 
diversity following the sale of its Haynesville/Cotton Valley assets to Aethon 
III, an affiliate of Aethon Energy Management LLC (not rated). Pro forma for 
the sale we estimate total proved reserves of 420 million barrels of oil 
equivalent (mmboe) and production of roughly 80,000 boe per day. We view this 
as more consistent with 'BB-' peers such as CNX Resources Corp. or Gulfport 
Energy Corp. QEP will now focus on its Permian and Williston basin assets, 
although the pending sale of the Williston assets will further reduce scale 
and asset diversity. We believe that asset and product diversity provide a 
cushion to regional and product price fluctuations such as the wide oil price 
differentials recently seen in the Permian Basin, as well as  potential 
changes in regulatory requirements, extreme weather, and other basin-specific 
events. In addition, expected financial measures have weakened from previous 
expectations, despite expected debt repayment with proceeds, following the 
recent reduction in our price assumptions for WTI in 2019 and 2020 (2019 
assumptions was reduced $10 per barrel to $50 and 2020 by $5 per barrel to 
$50. Pro forma for the Haynesville sale we expect funds from operations 
(FFO)/debt to average between 20% and 30%, and debt/EBITDA between 3x and 4x. 

The negative CreditWatch reflects the potential to lower the ratings on QEP 
following the close of the Williston sale, due to its reduced scale and asset 
diversity as well as uncertainty regarding the use of proceeds. If the sale is 
not executed, we could potentially lower the rating if the company does not 
take steps to adequately address its upcoming maturities. We expect to resolve 
the CreditWatch placement around the close of the Williston Basin sale, which 
we expect to occur late in the first quarter or early second quarter of 2019.