Lucid Energy Group II Holdings LLC Downgraded To 'B' From 'B+' On Revised Volume Growth Expectations; Outlook Stable

  • We expect slower volume growth than previously forecast for Lucid Energy Group II Holdings LLC, yielding elevated leverage in the 7.0x-7.5x range over the next 12 months.
  • As a result, we are downgrading our long-term corporate credit rating on Lucid Energy Group II Holdings LLC to 'B' from 'B+'.
  • We are also lowering our issue-level rating on parent Lucid Energy Group II Borrower LLC's $950 million senior secured first-lien term loan due 2025 to 'B' from 'BB-' and revising our recovery rating on the debt to '3' from '2'.
  • The stable outlook reflects our view that Lucid will execute the expansion of its gas gathering and processing infrastructure in the cost-competitive Northern Delaware basin. We expect any additional volumes will continue to be supported by long-term fixed-fee contracts.
 

NEW YORK (S&P Global Ratings) Feb. 11, 2019—S&P Global Ratings today took the 
rating actions listed above.  The downgrade reflects Lucid's elevated leverage 
and slower deleveraging than previously forecast. We expect leverage to remain 
high--in the 7.0x-7.5x area for the next 12 months compared with our prior 
expectation of 4.5x–5.5x--due to lower cash flow from slower-than-expected 
ramp-up in volumes. The company's 2018 financial performance was lower than 
expected due to lower activity ramp-up from decreased drilling by some 
producers. Rig count acceleration in 2018 was slower than forecast due to 
logistical constraints in the basin. The company also faced completion delays 
due to a shift to multi-well pad development and has lowered its 2021 EBITDA 
projection by around 30% to reflect these developments. As a result, we 
lowered our assessment of the financial risk profile from aggressive to highly 
leveraged. 



The stable outlook reflects our view that Lucid will execute the expansion of 
its gas gathering and processing infrastructure in the cost-competitive 
Northern Delaware basin. We expect volume throughput on the system to expand 
from increased drilling on the dedicated acreage and expansion projects on the 
company's South Carlsbad system. We expect any additional volumes will 
continue to be supported by long-term fixed-fee contracts. Under our base-case 
scenario, we are expecting debt to EBITDA of 7.0x-7.5x in 2019, declining to 
5.0x-5.5x in 2020 mainly driven by the improving cash flows from increased 
throughput volumes on the system from commissioning of projects under 
development and increased drilling on the company's dedicated acreage.


We could consider lowering the rating if we expect debt to EBITDA to remain 
above 7x in 2020, which would likely be due to lower-than-expected volumes on 
the system or increased levels of debt to finance the expansion projects. In 
addition, if we believe lower-than-anticipated volumes or higher operating or 
capital spending prolongs the time when the company reports positive cash flow 
and liquidity deteriorates, we could lower the rating.


We could raise the rating if we see an increase in the scale and scope of the 
operations via increased throughput volumes on the system that could come from 
new contracts or expansion projects. Improved diversity by commodity-type and 
geography would also help improve scale and scope. In addition, we could 
consider raising the rating if the company consistently sustains debt to 
EBITDA below 5x.
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