Oasis Petroleum Inc. Downgraded To 'CCC+' On Weaker Credit Metrics, Refinancing Risk; Outlook Negative

  • We expect Houston-based crude oil and natural gas exploration and production (E&P) company Oasis Petroleum Inc.'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.
  • In addition, given the weak capital market conditions, the company's currently poor debt trading levels, and the $963 million in debt maturities over the next 24 months, we believe there is an increased possibility that Oasis could execute a transaction that we could view as distressed.
  • As a result, we are lowering our issuer credit rating to 'CCC+' from 'B+'.
  • At the same time, we are lowering our issue-level rating on the company's senior unsecured notes to 'CCC+' from 'B+'. The '3' recovery rating indicates our expectation for meaningful (50%-70%; rounded estimate: 55%) recovery of principal in the event of a payment default.
  • The negative outlook reflects our view that the company could engage in a transaction we could view as distressed, given the weak capital market conditions, low oil prices, and significant upcoming debt maturities. We expect average funds from operations (FFO) to debt of about 15% over the next 12-24 months.
NEW YORK (S&P Global Ratings) March 26, 2020—S&P Global Ratings today took the rating actions listed above.
The collapse in oil prices will materially hurt Oasis Petroleum's cash flow and leverage metrics.   We now project the company's FFO to debt will average about 15% over the next two years, with debt to EBITDA of about 4.7x, affected by the sharp reduction in our oil price assumptions. About 70% of Oasis' production is oil, making its profitability very sensitive to moves in oil prices. Oasis has a strong hedge book in place for 2020, with 73% of its projected 2020 oil production hedged at an average price of about $48.50 per barrel (bbl) but is mostly unhedged in 2021, leaving it susceptible to price risk given the uncertain outlook. 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 liquidity could deteriorate to a level we would consider to be less than adequate given the company's significant upcoming debt maturities--in particular, its $891 million in senior unsecured notes maturing in March 2022--as well as the risk that the company's RBL size could be reduced at its next bank redetermination given the recent collapse in crude oil prices. In addition, given the weak capital market conditions and currently poor trading levels of the company's debt, we believe there is an increased likelihood the company could engage in a transaction we would view as distressed. We expect FFO to debt in the range of 15%-20% over the next 12-24 months.
We could lower the rating if we expected that unsupportive capital markets would limit the company's options to proactively refinance its upcoming debt maturities and we believed it would pursue a refinancing transaction that we could view as distressed. In addition, we could lower the rating if the company's liquidity deteriorated significantly, which would most likely occur from a material reduction to its RBL size or from lower-than-expected crude oil prices.
We could revise the outlook to stable if the company successfully addresses its 2022 debt maturity in a manner we do not consider to be distressed while maintaining adequate liquidity and a FFO to debt of well above 12%. This would likely require an improvement in capital markets and crude oil prices higher than our current assumption of $25/bbl for the remainder of 2020.
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