Concho Resources Inc. Outlook Revised To Stable From Positive On Weaker Commodity Prices; Ratings Affirmed

  • &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 Concho Resources Inc.'s financial measures to decrease in 2020 and 2021 from our previous assumptions.
  • We are affirming our 'BBB-' long-term issuer credit rating and senior unsecured issue-level rating on the company and revising the outlook to stable from positive.
  • The stable outlook reflects our expectation that Concho will maintain its modest financial policies such that funds from operations (FFO) to debt will remain greater than 45% on average despite the weak price environment. Further support for the rating is provided by favorable hedges in 2020 and maintenance of strong liquidity.
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 financial measures than expected for the positive outlook.   Concho's credit measures will decline from our previous expectations due to the significant decline in our oil price assumptions following the unprecedented reduction in demand stemming from the coronavirus, as well as the cessation of OPEC+'s 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 do not expect Concho's credit measures to be sufficient to support an upgrade. Specifically, we expect the company's FFO to debt to average below 60% in 2020 and 2021 while our WTI assumptions remain below $50 per barrel.
The stable outlook on Concho reflects our expectation that the company will continue to adhere to conservative financial policies, balancing production and shareholder returns within free cash flow. We expect the company to maintain credit measures appropriate for an investment-grade rating, including FFO to debt greater than 45%.
We could lower the rating if credit measures weakened such that Concho's FFO to debt approached 30% on a sustained basis without a clear path to improvement. We believe this could occur if the company assumed a substantially more aggressive capital-spending program that we current forecast, if its production were weaker than our current projections for several quarters, or if crude oil prices were to remain depressed for the next few years.
We could consider an upgrade if the company were able to increase and maintain FFO to debt above 60% for a sustained period. We would expect such a scenario to occur on the back of higher hydrocarbon prices.
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