Continental Resources Inc. Lowered To 'BB+' From 'BBB-' On Weaker Credit Measures, Refinancing Risk; Outlook Negative

  • We recently lowered our crude oil and natural gas price deck assumptions, including WTI crude oil to $25/bbl and Henry Hub natural gas to $2.00/mmBtu for the remainder of the year.
  • As a result, we expect independent oil and gas exploration and production company Continental Resources Inc.'s cash flow/leverage measures to be well below our expectations for the rating in 2020, although they should improve in 2021 due to capital spending reductions and a recovery in oil prices. We also expect significant upcoming debt maturities to be refinanced at higher interest rates.
  • We are lowering our issuer credit rating and unsecured debt ratings on Continental to 'BB+' from 'BBB-'. We are also assigning a '3' recovery rating to Continental's unsecured notes, indicating our expectation of meaningful (50% to 70%, rounded estimate 65%) recovery to creditors in the event of a payment default.
  • Our negative outlook reflects the potential for a downgrade if we expected FFO/debt to remain below 20% for a sustained period, which would most likely occur if oil prices remain weak and the company did not take further steps to reduce capital spending.
NEW YORK (S&P Global Ratings) March 27, 2020—S&P Global Ratings today took the rating actions above.
We estimate cash flow/leverage measures will fall well below our expectations for the rating in 2020.  Based on our revised oil and natural gas price deck assumptions (see "S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure," published March 19, 2020), we now expect Continental's funds from operations (FFO) to debt to fall below 20% in 2020, from nearly 60% in 2019. The company has no oil or natural gas hedges in place, leaving the company susceptible to price volatility amid an uncertain commodity price outlook. Oil accounts for about 60% of the company's total production and thus profitability is strongly susceptible to moves in oil prices. Although Continental should be cash flow neutral this year due to a significant reduction in capital spending, we estimate a slight cash flow deficit in 2021 as the company ramps up spending to stem production declines.
The negative outlook reflects our view that - despite significant capital spending cuts - Continental's leverage is currently weak for the rating. We estimate FFO/debt will fall below 20% in 2020, improving to the 25% to 30% range next year as oil prices recover and the company increases spending and stems production declines. Our estimates also assume the company does not execute any share buybacks over the next two years, and that it takes steps to address its 2022 debt maturity by mid-2021.
We could lower the rating if Continental's FFO to debt remains below 20% for a sustained period, which would most likely occur if oil prices average below our current price deck assumptions, the company pursues a more aggressive spending program than we currently forecast next year, or if its production comes in below our expectations for several quarters. We could also take a negative rating action if the credit markets remain volatile, and the company does not address its 2022 debt maturity before it becomes current.

We would consider a stable outlook if FFO/debt remains comfortably above 30% for a sustained period. This would most likely occur if oil prices recover back to at least $45/bbl and the company continues to exercise capital discipline.
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