EOG Resources Inc. Outlook Revised To Negative On Weaker Credit Metrics; 'A-' Rating Affirmed

  • We expect U.S.-based oil and gas exploration and production company EOG Resources Inc.'s leverage metrics to weaken following our oil and gas price revisions, and we are forecasting negative discretionary cash flow in 2020 and 2021.
  • While its balance sheet is reasonably strong, EOG's modest hedge portfolio exposes the company to commodity price volatility and we expect several significant upcoming bond maturities may be refinanced at higher interest rates.
  • We affirmed our 'A-' issuer credit rating on EOG and revised the outlook to negative from stable.
  • The negative outlook reflects our view that average FFO to debt will decrease to around 70% and debt to EBITDA will rise above 1x over the next two years, with approximately flat production. While leverage metrics remain stronger than our previous downgrade trigger, we now expect the company to generate negative discretionary cash flow over the coming years.
NEW YORK (S&P Global Ratings) March 18, 2020—S&P Global Ratings today took the rating actions listed above.
We expect cash flow/leverage metrics will be significantly lower than our previous forecast.   Based on our revised oil and natural gas price deck assumptions (see "Unrestrained Supply Swamps Oil Outlook: S&P Global Ratings Revises Oil & Gas Assumptions," published March 9, 2020) we are now projecting average funds from operations (FFO) to debt and debt to EBITDA of around 70% and 1.25x, respectively, versus prior respective estimates of over 130% and well below 1x. Similar to other large exploration and production (E&P) peers, EOG's modest hedge book covering approximately 28% of 2020 oil production and 36% of natural gas production leaves the company predominantly exposed to commodity price volatility.
The negative outlook reflects our view that average FFO to debt will decrease to around 70% and debt to EBITDA will rise above 1x over the next two years with approximately flat production. While leverage metrics remain above our previous downgrade trigger, we now expect the company to generate negative discretionary cash flow (DCF) over the coming years.
We could lower the rating if we expect FFO to debt to approach 45%, which would most likely occur if commodity prices fell below our current price deck assumptions, or if the company funded shareholder returns with debt financing.

We could revise the outlook to stable if the company's credit measures improve such that FFO to debt is well above 60% and debt to EBITDA is well below 1.5x on a consistent basis. We could also consider a revision if the company can sustain positive DCF, which would most likely occur if oil production exceeded our expectations.
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