HighPoint Resources Corp. Downgraded To 'CCC+' On Liquidity Risks; Outlook Negative

  • The coronavirus has had a significant impact on the global economy, resulting in demand destruction for crude oil and natural gas. A market share war between Saudi Arabia and Russia has exacerbated an already weak market and led to crash in crude oil prices.
  • S&P Global Ratings has lowered its oil and natural gas price assumptions and now forecasts that Brent will average $30 per barrel, West Texas Intermediate (WTI) $25 per barrel, and Henry Hub natural gas $2.00 per mmbtu for the remainder of 2020.
  • HighPoint is well hedged through 2020 providing a measure of cash flow stability. Nevertheless, we expect price assumptions on unhedged production underpinning reserve-based lending facilities (RBLs) across the industry to decline given current strip pricing, potentially constraining liquidity. At the same time, the company has announced it has deferred all drilling and completion activity in the last half of 2020.
  • We are lowering our issuer credit rating on HighPoint to 'CCC+' from 'B'. We are lowering the rating on the unsecured notes to 'CCC' from 'B' and revising our recovery rating on the notes to '5' from '3'.
  • The negative outlook reflects our view that oil and natural gas prices will remain challenged over the next few years, oil and gas companies will have limited access to capital markets, liquidity could weaken further, and HighPoint could engage in transactions we could view as distressed.
NEW YORK (S&P Global Ratings) March 27, 2020—S&P Global Ratings today took the rating actions listed above.
In our opinion, there is the potential for HighPoint's liquidity to weaken despite being well hedged in 2020.   The company recently announced its hedged position in 2020 covers approximately 90% of anticipated 2020 oil volumes at an average weighted West Texas Intermediate (WTI) price of approximately $58 per barrel with an estimated mark-to-market value of $225 million at current strip prices, which will provide for some cash flow certainty. However, we think, given current market conditions, there is a chance the company's borrowing base on its revolving credit facility could be cut in the spring, which will further constrain liquidity and drilling and completion activity.
The negative outlook reflects our expectation for weakening liquidity, resulting from lower hydrocarbon prices despite the company being well hedged through 2020. Due to lower bank price decks and the company's announcement that it will defer drilling and completion activity in the latter half of 2020, the company's borrowing base has the potential to be reduced at its spring redetermination, further reducing liquidity. Additionally, we think there is increased risk of the company executing a transaction we could view as distressed given current capital market conditions and its upcoming 2022 unsecured debt maturity.
We could lower the rating if HighPoint's liquidity weakens further or if the company announces a transaction we would view as distressed. Such a scenario is possible if HighPoint outspends cash flow or the company's borrowing base is cut.

We could revise the outlook to stable if HighPoint's liquidity improved and it becomes more likely that it is able to address its 2022 maturity while maintaining adequate liquidity. We could also revise the outlook if we no longer viewed the company as likely to execute a transaction t we would view as distressed. This would likely occur if hydrocarbon prices increased and access to capital markets improved.
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