Cimarex Energy Co. Outlook Revised To Negative On Weaker Financial Measures; 'BBB-' Rating Affirmed

  • S&P Global Ratings has lowered its oil and natural gas price assumptions and now forecasts that Brent will average $30 per barrel and West Texas Intermediate (WTI) oil $25 per barrel for the remainder of 2020.
  • We expect exploration and production (E&P) company Cimarex Energy Co.'s financial measures to be weak for the current rating in 2020.
  • We are affirming our 'BBB-' long-term issuer credit rating and senior unsecured issue-level rating on the company and revising the outlook to negative from stable.
  • The negative outlook reflects weaker-than-anticipated financial measures in 2020. This follows the decline in oil, gas and natural gas liquids prices and limited hedges in 2020 and 2021. However, the rating is supported by low debt levels, strong liquidity, and no need to access the capital markets in the near to medium term, with Cimarex's nearest debt maturity not until June 2024.
NEW YORK (S&P Global Ratings) March 26, 2020—S&P Global Ratings today took the rating actions listed above.
The drop in oil prices will result in weaker-than-expected financial measures for the current rating.   The negative outlook reflects the significant decline in our oil price assumptions due to the unprecedented reduction in demand stemming from the coronavirus, as well as the cessation of OPEC's (and others') production limits and the resulting price war between Saudi Arabia and Russia. In particular, we expect crude oil prices to be significantly lower on average in 2020, including WTI at $25 per barrel and Brent at $30 per barrel. Therefore, we expect Cimarex's near-term financial measures to be weak for the current rating before recovering along with our price assumptions in 2021. Specifically, we expect the company's funds from operations (FFO) to debt to average below 30% in 2020, before materially improving in 2021, when we forecast average prices of $45 per barrel for WTI. We also assume Cimarex will initiate cost reductions and moderate the pace of capital spending to maintain its balance sheet.
The negative outlook on Cimarex reflects weakening financial measures resulting from lower hydrocarbon prices and weaker demand. Additionally, the outlook takes into account weak capital markets in which we expect oil and gas companies' access to markets could be challenged. However, Cimarex has relatively low debt levels, strong liquidity, and no immediate need to access the capital markets, all of which currently supports the rating.
We could lower the rating if FFO to debt dropped below 30% for a sustained period or if liquidity weakened. This could occur if oil and natural gas prices remain below $30 per barrel (bbl) and $2.00/mmBtu for an extended period and the company does not reduce its capital spending.
We could return the outlook to stable if the company's FFO to debt is comfortably above 30% while maintaining at least adequate liquidity. Such a scenario could occur if hydrocarbon prices increase and the company continues to align capital spending with cash generation.
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