Gran Tierra Energy Inc. Downgraded To 'B' On Weaker Credit Metrics Due To Lower Oil Prices; Outlook Negative

  • The credit metrics of Canada-based oil and gas producer Gran Tierra Energy Inc. (GTE) will be weaker than our expectations for the next two years following the March 19, 2020, revision of our oil and gas price assumptions.
  • GTE faces high exposure to lower crude oil prices and the current economic downturn, which we believe will drive the company to reduce operations in high-cost production wells by 19% in 2020 (compared with 2019) and to significantly reduce its capital expenditure (capex) prospects to preserve its liquidity.
  • On March 27, 2020, S&P Global Ratings lowered its issuer credit and issue-level ratings on GTE to 'B' from 'B+'.
  • The negative outlook indicates a possible delay in the company's financial performance improvement, based on our uncertainty regarding the recovery in crude oil prices for the next 12-18 months. This could occur if the economic downturn and the COVID-19 pandemic persist for a prolonged period, compromising the company's growth prospects. In this scenario, we believe GTE's leverage metrics would be pressured, including a debt-to-EBITDA ratio above 5.0x for 2020.
MEXICO CITY (S&P Global Ratings) March 27, 2020--S&P Global Ratings today took the rating actions listed above.
The fall in oil prices will compromise GTE's credit metrics. Our latest revision to our crude oil and gas price assumptions reflects the price war between Saudi Arabia and Russia as well as a likely massive drop in demand due to COVID-19. The revised price deck includes an average annual price assumption for Brent crude oil of $30 per barrel (versus $40/bbl) for 2020 and $50/bbl (versus $50/bbl) for 2021 (see "S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure," March 19, 2020). We believe GTE's leverage metrics could sharply fall below our previous expectations, leading to debt to EBITDA above 5.0x, funds from operations (FFO) to debt below 20.0%, and free operating cash flow to debt below 5.0%.
The current economic downturn likely will prompt GTE to reduce operating costs and could delay growth prospects. Oil prices have a significant impact on the company's profitability. In the event of an economic downturn, oil and gas companies tend to contract production activities, which leads to a decrease in EBITDA generation. We expect GTE to reduce production 19.0% for 2020, a trend that could taint production for 2021. Our assumptions include total production of 10.2 million barrels of oil equivalent (mboe) for 2020 and 13.3 million mboe in 2021, mostly because of cuts in exploratory and non-core well drilling activities, such as in Ecuador. Even though we expect the company to reduce production and transportation costs, low oil prices would still lead to a 66.3% drop in EBITDA generation in 2020 compared with 2019.
In our view, uncertainty about the duration of these market conditions could prompt the company to slow down its growth prospects. We believe that even though its contraction measures would preserve the company's liquidity, the lower expansion and production investments could curtail the revamp in operations in the future.
GTE's capex cuts and non-debt maturities should stem cash loses during 2020. We continue assessing liquidity as strong. We expect the company to cut approximately 70% of its capex by putting on hold expansion investments and drilling activities to offset the drop in operating cash generation. The company maintains $118 million in undrawn committed credit lines, which could affect its liquidity position in a stressed scenario. We will continue monitoring the company's liquidity in the next 12 months, as its reduced hedging strategy on oil prices could lead to wide cash loses.
The negative outlook reflects our expectation that the economic downturn and a possible delay in crude oil price recovery could limit GTE's EBITDA generation for the next 12-18 months.
We could lower the ratings in the next 12-18 months if GTE continues drifting from our expectations because of adverse economic conditions, leading to debt to EBITDA above 5.0x and FFO to debt below 30.0%. This could occur if GTE's production deviates significantly from our current projections, or if oil prices remain below our current price deck for a sustained period and the company is unable to reduce costs, resulting in lower EBITDA generation.
We could revise the outlook to stable in the next 12-18 months if GTE is able to absorb the economic downturn, reflected by lower crude oil prices, and indicates a recovery in production volumes, while maintaining average debt to EBITDA below 3.0x and FFO to debt above 30.0%.
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