Moody's Downgrades to Clayton Williams Energy (CWEI) 'Caa3', Upgrades Parsley Energy (PE) to 'B2'

Clayton Williams Energy (NYSE: CWEI)
Parsley Energy (NYSE: PE)

Moody's Investors Service, ("Moody's") concluded rating reviews on three US B-rated exploration and production (E&P) companies. Moody's downgraded one company's ratings three notches, and upgraded two companies' ratings one notch. A list of each company's rating actions is included below.

RATINGS RATIONALE

Oil prices have dropped substantially reflecting continuing oversupply in the global oil markets, very high inventory levels and additional Iranian oil exports coming on line. Furthermore, North American natural gas and natural gas liquids prices remain quite weak. Moody's lowered its oil price estimates on January 21 and expects a slow recovery for oil prices over the next several years. For E&P companies, cash flow declines in tandem with oil prices, with the decline weakening credit metrics and liquidity, and increasing their negative free cash flow. The drop in oil prices and corresponding capital market concerns will also raise financing costs and increase refinancing risks for E&P companies.

The drop in oil prices has caused a fundamental change in the energy industry, and its ability to generate cash flow has fallen substantially. Moody's believes this condition looks likely to persist for several years. As a result, Moody's is recalibrating the ratings of many energy companies to reflect this industry shift. However, the impact of the drop in oil prices will vary substantially from issuer to issuer. As a result, Moody's downgraded the current ratings of one company by multiple notches, while upgrading others.

Clayton Williams Energy, Inc.

Moody's downgraded Clayton Williams Energy, Inc.'s (CWEI) Corporate Family Rating (CFR) to Caa3 from B3, with a stable outlook. The downgrade reflects the company's poor cash margins, high leverage and very weak cash flow based metrics due to the subdued commodity price outlook and lack of meaningful cash flow from hedges through 2017. The company's leverage metrics are expected to worsen materially and negative cash flow generation is likely to continue through at least 2017. CWEI's small scale and high debt balances exacerbate its weak credit profile. The company's ratings are supported by an oil-focused asset base and adequate liquidity due to higher cash balances from the recent issuance of a second lien term loan.

The stable outlook reflects CWEI's adequate liquidity at a time of low oil prices. The company's ratings could be downgraded if liquidity drops below $100 million or retained cash flow remains negative. The ratings could be upgraded if CWEI's EBITDA to Interest Expense exceeds 1.5x on a sustained basis and the company maintains adequate liquidity with enough cushion under its covenants.

CrownRock, L.P.

Moody's upgraded CrownRock, L.P.'s (CrownRock) Corporate Family Rating (CFR) to B2 from B3, with a stable outlook. The upgrade reflects the company's improving scale and credit metrics amid better EBITDA despite the fall in commodity prices. The B2 CFR reflects CrownRock's modest but improved scale, large percentage of oil production, good margins given a generally favorable hedging profile, and management's track record of growing reserves and production in the Permian Basin. The company's vertical drilling activities in the Permian, a well-known, long-lived oil field, entail lower operating risk as compared to similarly rated peers. CrownRock has a high concentration in the Permian, accounting for nearly all its proved reserves and its PV-10 value. CrownRock's B2 CFR also considers its somewhat high leverage, especially debt to average daily production at $32,000/boe and private equity ownership. We expect an improvement in leverage as CrownRock continues to grow its scale.

The stable outlook considers the company's ability to improve its scale and leverage metrics from its drilling program for its Wolfberry acreage. The rating could be upgraded if production were to reach 45,000 boe/d and retained cash flow to debt is likely to remain above 25%. The rating could be downgraded to B3 if retained cash flow to debt falls below 15%, EBITDA to interest falls below 3x, or if liquidity worsens.

Parsley Energy LLC

Moody's upgraded Parsley Energy, LLC's (Parsley) Corporate Family Rating (CFR) to B2 from B3, with a stable outlook. The upgrade reflects the company's strong execution on its growth capital spending, rising EBITDA despite the fall in commodity prices, and improving credit metrics which have been helped by equity issuances. The B2 CFR reflects its relatively modest scale and concentrated geographic presence. The rating also incorporates the impact of the low crude oil price environment, which is mitigated somewhat by Parsley's hedges for 2016 and 2017. The CFR is supported by quality acreage in the Permian Basin, liquids-rich production that generates good cash margins, multiple year drilling inventory, and a high degree (99%) of operational control over its leasehold acreage, which allows for flexible capital allocation and development of its acreage in light of crude price volatility.

The stable outlook reflects our expectation that production will be sustained at or above 30,000 boe/d in 2016 and cash flow metrics will remain strong. The rating could be upgraded to B1 if production were to reach 40,000 boe/d, retained cash flow to debt is likely to remain above 20%, and the company approaches cash flow neutrality after considering capex. The rating could be downgraded to B3 if retained cash flow to debt falls below 10%, EBITDA to interest falls below 2.5x, or if liquidity worsens.

The principal methodology used in these ratings was Global Oilfield Services Industry Rating Methodology published in December 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

..Issuer: Clayton Williams Energy, Inc.

Downgrades:

.... Probability of Default Rating, Downgraded to Caa3-PD from B3-PD

.... Corporate Family Rating, Downgraded to Caa3 from B3

....Senior Unsecured Regular Bond/Debenture, Downgraded to Ca (LGD 5) from Caa1 (LGD 5)

Affirmations:

.... Speculative Grade Liquidity Rating, Affirmed SGL-3

Outlook Actions:

..Issuer: Clayton Williams Energy, Inc.

....Outlook, Changed To Stable From Rating Under Review

..Issuer: CrownRock, L.P.

Upgrades:

.... Probability of Default Rating, Upgraded to B2-PD from B3-PD

.... Corporate Family Rating, Upgraded to B2 from B3

....Senior Unsecured Regular Bond/Debentures, Upgraded to B3 (LGD 4) from Caa1 (LGD 4)

Outlook Actions: ..Issuer: CrownRock, L.P.

....Outlook, Changed To Stable From Rating Under Review

Downgrades: Upgrades: ..Issuer: Parsley Energy LLC

.... Probability of Default Rating, Upgraded to B2-PD from B3-PD

.... Corporate Family Rating, Upgraded to B2 from B3

....Senior Unsecured Regular Bond/Debenture (Local Currency) Feb 15, 2022, Upgraded to B3 (LGD5) from Caa1 (LGD5)

Outlook Actions:

..Issuer: Parsley Energy LLC

....Outlook, Changed To Stable From Rating Under Review

Affirmations:

..Issuer: Parsley Energy LLC

.... Speculative Grade Liquidity Rating, Affirmed SGL-3

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