Matador Resources Co. Downgraded To 'B-' On Weaker Credit Metrics, Tighter Liquidity; Outlook Negative

  • We expect Dallas-based crude oil and natural gas exploration and production (E&P) company Matador Resources Co.'s cash flow and leverage metrics will weaken materially from our previous expectations following the recent collapse in oil prices and S&P Global Ratings' significant downward revisions to its oil price assumptions.
  • Although currently adequate, we believe Matador's liquidity position could deteriorate if oil prices remain weak for a prolonged period, given the current balance drawn on its credit facility, limited hedging, and projected negative free operating cash flow (FOCF).
  • As a result, we are lowering our issuer credit rating to 'B-' from 'B+'. At the same time, we are lowering our issue-level rating on the company's senior unsecured notes to 'B' from 'BB-'. The '2' recovery rating indicates our expectation for substantial (70%-90%; rounded estimate: 80%) recovery of principal in the event of a payment default.
  • The negative outlook reflects our view that liquidity could deteriorate and credit metrics worsen to a level no longer appropriate for the rating, notwithstanding an improvement in oil prices. We currently expect average funds from operations (FFO) to debt of about 15% over the next 12 months.
NEW YORK (S&P Global Ratings) March 27, 2020—S&P Global Ratings today took the rsting actions listed above.
With limited hedging, the collapse in oil prices will materially hurt Matador's cash flow and leverage metrics.   We now project the company's FFO to debt will average about 15%-20% over the next two years, with debt to EBITDA of about 4.6x-4.8x, affected by the sharp reduction in our oil price assumptions. Matador has hedged about 45% of our projected oil production in 2020 at an average floor price of about $48 per barrel (bbl), but is unhedged thereafter, leaving the company susceptible to price volatility amid an uncertain oil price outlook. Oil accounts for about 60% of the company's total production and thus profitability is strongly susceptible to moves in oil prices. S&P Global Ratings recently revised our price assumption for West Texas Intermediate (WTI) crude oil to $25/bbl in the remainder of 2020 and $45/bbl in 2021.
The negative outlook reflects the risk that we could lower the rating if liquidity deteriorates to a level we would consider to be less than adequate or if leverage metrics reach an unsustainable level. We currently expect FFO to debt will average 15%-20% and debt to EBITDA will average 4.6x-4.8x over the next two years.
We could lower the rating if the company's liquidity deteriorated significantly, which would most likely occur from a reduction to Matador's RBL size or from material negative FOCF. In addition, we could lower the rating if leverage metrics deteriorated to an unsustainable level, including FFO to debt of below 12% with no clear path to recovery. This would most likely result from crude oil prices below our current assumptions of $25/bbl in 2020 and $45/bbl in 2021, or if production falls short of our projections with no offsetting reduction in capital spending.
We could revise the outlook to stable if we expected the company's FFO to debt to exceed 20% for a sustained period, while maintaining adequate liquidity. This would likely require crude oil prices higher than our current assumption of $25/bbl in the remainder of 2020.
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