S&P Lowers Outlook on Goodrich Petroleum (GDP) to Negative

Standard & Poor's Ratings Services today revised the rating outlook on Goodrich Petroleum Corp. (NYSE: GDP) to negative from stable. We also affirmed our 'B-' corporate credit rating on Goodrich and our 'CCC' issue-level rating on the company's senior unsecured debt. The recovery rating on this debt is '6', which indicates our expectation of negligible (0% to 10%) recovery to creditors if a default occurs. In addition, we affirmed our 'CCC-' issue-level rating on Goodrich's perpetual preferred stock.

We expect Goodrich's liquidity to deteriorate next year absent potential asset sales, a joint-venture arrangement, or a meaningful reduction in capital spending. Based on our view that the company will continue to pursue its strategy of delineating its large acreage position in the emerging Tuscaloosa Marine Shale (TMS) oil play, and that it will spend at least as much in the play next year as it plans to spend in 2014 ($200 million to $250 million), we believe the company will have to take steps to raise external capital over the next six months to preserve liquidity. Goodrich has indicated that it is evaluating noncore asset sales and it continues to pursue a joint-venture partner for the TMS; however, the recent drop in crude oil prices could slow the process. Alternatively, Goodrich could reduce its capital spending levels in 2015, but would risk losing some of its TMS acreage. "We have revised the rating outlook on Goodrich to negative to reflect a potential downgrade if the company does not take steps to improve liquidity, such as executing on asset sales, finding a joint-venture partner, or significantly reducing capital spending, over the next six months," said Standard & Poor's credit analyst Carin Dehne-Kiley.

We view Goodrich's business risk profile as "vulnerable" given its small size, limited geographic diversity, and meaningful exposure to weak natural gas prices, although the company has been shifting to oil production over the past two years. At year-end 2013, Goodrich's proven reserve base was 452 billion cubic feet equivalent, 73% of which was natural gas and 39% of which was developed. The company has high exposure to dry gas, the pricing of which we expect to remain well below crude oil on an energy equivalent basis. Nearly 80% of the company's reserves are associated with dry gas plays in the Haynesville Shale and Cotton Valley sands (Louisiana/East Texas), with about 15% in the oil-focused Eagle Ford Shale (South Texas) and 5% in the emerging TMS (Mississippi/Louisiana).

The negative outlook reflects a potential downgrade if the company does not take steps to improve liquidity, such as executing on asset sales or reducing capital spending, over the next six months.

We could revise the outlook to stable if we expected sources of liquidity to exceed uses over the next 12 months, which would most likely occur if Goodrich can raise external capital through asset sales or a joint-venture, or by meaningfully reducing capital spending.

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