Fitch Revises Energy XXI Gulf Coast's Outlook to Negative; Affirms IDR at 'B'

Dec 15, 2014 16:58 UTC

CHICAGO--(Business Wire)--Fitch Ratings has affirmed EXXI's ratings as follows:

Energy XXI Gulf Coast Inc.

--Issuer Default Rating (IDR) at 'B';

--Senior secured revolver at 'BB/RR1';

--Senior unsecured notes at 'B/RR4'.

Energy XXI LTD

--IDR at 'B-';

--Convertible perpetual preferred at 'CCC/RR6';

--Convertible notes at 'CCC/RR6'.

The Rating Outlook has been revised to Negative from Stable. Approximately $3.9 billion in debt is affected by this rating action.

KEY RATING DRIVERS

EXXI ratings are supported by a clearer path to operational stability as well as stable, though elevated, credit metrics after the acquisition of EPL Oil & Gas in 2014. Positive operating trends are offset by the recent upheaval in global crude markets leading to lower oil prices and subsequent challenges for EXXI in implementing its deleveraging plan.

The Negative Outlook is driven by uncertainties around the length and depth of the crude downturn, with several follow-on effects. These include the ability of the company to renew hedges at reasonable levels in 2016, uncertainty on execution and timing of potential asset sales, as well as the possibility of lower overall liquidity following future redeterminations of the bank borrowing base.

CREDIT CONCERNS

EXXI remains highly leveraged after the EPL acquisition, and management's intention to meaningfully deleverage with free cash flow will likely be delayed given current oil market conditions. Fitch expects consolidated debt/EBITDA under 5.0x in FY15. While Fitch believes that current and projected credit metrics are appropriate for the rating category, headroom in the rating has effectively been eliminated. Additionally, while EXXI has 60% of expected oil production for calendar 2015 hedged, 2016 oil hedges are minimal at around 5% of run-rate production, and the current forward curve remains at levels where it would be unattractive for the company to meaningfully hedge. In our base case, Fitch anticipates that production volumes will be flat to modestly positive given the expected resolution of recent operational issues. To the extent that current volumes are not sustained Fitch would view this as a credit negative given limited overall headroom in the rating.

FREE CASH FLOW

Management currently expects to spend $680 million for capex in FY15. As much of this spending was front-loaded Fitch anticipates limited oil-price related changes to FY15 spending, as well as free cash flow of -$150 million in FY15. However, given the company's ability to sustain production levels with lower capex levels, Fitch anticipates positive free cash flow along with modest debt reduction in FY16 and FY17 in a $70-$75 WTI price environment. In a lower oil price environment, cash burn should be manageable in the near term given the company's current liquidity position, though leverage metrics could be stressed.

LIQUIDITY

As of Sept. 30, EXXI had $119.5M in cash and $525.7M available on the credit facility, leading to approximately $645 million in available liquidity. In our base case ($75/WTI), liquidity should be adequate given anticipated free cash flow in FY16 and FY17. Under more challenging conditions (WTI $55-65), Fitch anticipates liquidity to be adequate in the near term. EXXI has approximately 60% of calendar 2015 oil volumes hedged at an average of approximately $84/bbl, leading to higher-than-market operating cash flow. Near term cash burn rates should remain manageable if crude is sustained above $50/bbl. Capital expenditures would likely be revised downward in the event of oil prices sustained under $65/bbl, temporarily increasing liquidity through lower capex and less cash burn. Potential cash burn rates at various crude prices are factored into the liquidity analysis and overall outlook.

CRUDE OIL SCENARIOS

Fitch ran a number of price scenarios to capture what EXXI might look like in a sustained downside oil case. In cases with prices sustained above $65/bbl free cash flow was neutral to slightly positive and liquidity concerns were not material. In a sustained downside case, and without meaningful hedge protection in calendar 2016, credit metrics and liquidity could become challenged. Fitch will monitor the continuing developments in crude markets, improvements in operating costs, hedge positions, and liquidity in assessing EXXI credit quality. While Fitch rates through the cycle to a long-term oil base case of $75/bbl, uncertainty around near-term elements, including asset sale proceeds and liquidity, factors into the rating and outlook.

RECENT FINANCIAL PERFORMANCE

As calculated by Fitch, LTM EBITDA was $752 million, leading to consolidated LTM debt/EBITDA of 5.2x. LTM interest coverage was 3.8x. Leverage metrics have been elevated post-acquisition but remain in line for the rating category. Quarterly production volumes were up 27% for the quarter ended Sept. 30, generating additional cash flow and helping to mitigate market concerns about lower production volumes after the EPL acquisition. With the current production profile and cost structure, Fitch calculates EXXI crude oil breakeven at approximately $65/bbl. When combined with the company's liquidity position, these factors should enable the company to weather a period of lower oil prices. Fitch also expects further improvements in the cost structure as one-time items work through the P&L, infrastructure and debottlenecking issues are resolved, and rig day rates are renegotiated in 2015.

RATING SENSITIVITIES

Negative: Future developments that could lead to negative rating action include:

--Consolidated debt/EBITDA sustained over 5.0x and/or negative free cash flow in FY16 driven by sustained lower oil prices;

--Failure to maintain current production levels leading to debt/flowing barrel above $70,000;

--Inability to maintain adequate liquidity through free cash flow or asset sales;

--Inability to meaningfully hedge 2016 oil volumes.

Positive: Future developments that may lead to positive rating actions include:

--Sustained increases in overall production levels with positive free cash flow generation and subsequent debt reduction;

--Demonstrated commitment to lower debt levels leading to mid-cycle Debt/EBITDA below 3.5x;

--Upgrades are not considered probable in the near term given headwinds from lower crude prices, as well as limited capacity to pay down material amounts of debt.

Additional information is available at ' www.fitchratings.com'.

Applicable Criteria & Related Research:

--'E&P Borrowing Base Redeterminations: History Suggests Lenders May Go Easy in a Downturn' (Dec. 5, 2014);

--'Full Cycle Costs for North American E&P (Production Costs Moderate in 2013)' (July 30, 2014);

--'North American Energy Outlook and LNG' (July 16, 2014);

--'North American Exploration and Production Handbook' (July 16, 2014);

--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Global Impact of US Shale Oil - Rising Production Tempers World Prices' (Feb. 10, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://ift.tt/1x1u6DJ

Global Impact of U.S. Shale Oil (Rising Production Tempers World Prices)

http://ift.tt/1wTibL0

E&P Borrowing Base Redeterminations (History Suggests Lenders May Go Easy in a Downturn)

http://ift.tt/1wTibL4

Full Cycle Costs for North America E&P (Production Costs Moderate in 2013)

http://ift.tt/1vSwYyk

North American Energy Outlook and LNG

http://ift.tt/1wTi9CY

North American Exploration and Production Handbook

http://ift.tt/1wTibL6

Additional Disclosure

Solicitation Status

http://ift.tt/1vSx0Xc

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Fitch RatingsPrimary AnalystBrad Bell, +1-312-368-3149Associate DirectorFitch Ratings, Inc.70 W. Madison StreetChicago, IL 60602orSecondary AnalystMark C. Sadeghian, CFA, +1-312-368-2090Senior DirectororCommittee ChairpersonMichael L. Weaver, +1-312-368-3156Managing DirectororMedia RelationsBrian Bertsch, New York, +1-212-908-0549brian.bertsch@fitchratings.com