S&P Downgrades Rex Energy (REXX) to 'B-'; Sees Leverage Elevating Beyond FY15 Triggers

Standard & Poor's Ratings Services lowered its corporate credit rating on Rex Energy Corp. (Nasdaq: REXX) to 'B-' from 'B'. The rating outlook is stable. In addition, we lowered our issue-level rating on Rex's senior unsecured debt to 'CCC+' from 'B-'. The recovery rating on this debt remains '5', indicating our expectation of modest (10% to 30%) recovery in the event of a payment default.

"The downgrade on Rex reflects our expectation that the company's debt leverage will increase to levels beyond our downgrade triggers in 2015 and will likely remain elevated for the next couple of years under our price assumptions," said Standard & Poor's credit analyst Christine Besset.

We view Rex's business risk profile as "vulnerable," This assessment primarily reflects the company's participation in the volatile and capital-intensive oil and gas exploration and production (E&P) industry, its relatively modest proved reserve base, limited geographic diversity, and exposure to weak natural gas and ethane prices. We assess Rex's financial risk as "highly leveraged," reflecting our expectation that the company's credit measures will deteriorate significantly in 2015 and remain weak over the next three years due to low commodity prices. We consider liquidity to be "adequate" because we project that Rex will be able to maintain liquidity sources divided by uses of at least 1.2x at least for the next 12 months.

The stable outlook incorporates our belief that Rex Energy Corp. will continue to focus on improving operating costs and efficiencies while containing capital spending to weather currently challenging market conditions. Although we expect credit measures to deteriorate this year, we expect the company will maintain "adequate" liquidity for the next 12 months.

We could lower the rating if liquidity deteriorates more than forecasted, which would most likely be due to weaker-than-expected commodity prices or higher-than-expected operating costs or capital spending. We could also lower the rating if we believe that the capital structure becomes unsustainable.

We could consider an upgrade if the company is able to maintain sufficient liquidity and debt ratios strengthen such that FFO to debt exceeds 12% and debt to EBITDAX is below 5x.

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