Moody's Raises Outlook on Rice Energy (RICE) to Positive; Production Growth, Proved Reserves Show Strength

Moody's Investors Service (Moody's) affirmed Rice Energy Inc.'s (NYSE: RICE)(Rice) B2 Corporate Family Rating (CFR), B2-PDR Probability of Default Rating, B3 senior unsecured note rating, and SGL-3 Speculative Grade Liquidity Rating. The rating outlook has been changed to positive from stable.

"Rice's rating affirmation and positive outlook reflect Rice's strong growth in production and proved developed reserves at favorable returns, which we expect will continue through 2016," commented Gretchen French, Moody's Vice President. "However, in order to be upgraded, Rice will also need to demonstrate that it can continue to maintain consolidated credit metrics indicative of a higher rating category as it continues to grow both its upstream and midstream operations."

Rice Energy Inc. Ratings List:

Corporate Family Rating - affirmed at B2

Probability of Default Rating - affirmed at B2-PD

Senior unsecured notes due 2022 --affirmed at B3 (LGD 5)

Speculative Grade Liquidity Assessment (SGL) -- affirmed at SGL-3

Rating Outlook -- changed to Positive from Stable

RATINGS RATIONALE

Rice's B2 CFR benefits from the company's low cost, early entry position in the Marcellus Shale, where it has established a favorable acreage position and demonstrated strong drilling and operating performance relative to peers, both of which support continued, visible production and cash flow growth potential. In addition, the company has proven its willingness to use equity to finance acreage acquisitions. However, the company faces several years of outspending cash flow as it further develops and holds its acreage positions in both the Marcellus and still early stage Utica shale, which entails both execution risk and the need to maintain strong access to funding sources.

Rice's rating continues to be constrained by the company's improving but still short operating history compared to higher rated, B1 exploration and production (E&P) peers, with an overall high portfolio decline rate and production concentration in the Marcellus. Although, with the formation of a midstream master limited partnership (MLP) in late 2014, Rice has expanded its sources of liquidity and partially monetized its valuable midstream infrastructure, the MLP formation has also increased the company's structural complexity. The high payouts associated with the MLP, along with expectations of increased debt at both the MLP and at Rice's retained midstream business, will constrain Rice's consolidated retained cash flow/debt metrics.

The B3 rating on Rice's senior unsecured notes reflects both Rice's overall probability of default, to which Moody's assigns a PDR of B2-PD, and a loss given default of LGD 5. The senior notes benefit from upstream guarantees from all subsidiaries except for its midstream subsidiaries. The notes are unsecured and contractually subordinated to the senior secured credit facility's potential priority claim to the company's assets. The borrowing base under the revolver is currently $550 million, with the next redetermination scheduled for April 2015. The size of the potential senior secured claims relative to the unsecured notes outstanding results in the senior notes being notched one rating below the B2 CFR under Moody's Loss Given Default Methodology.

Rice's SGL-3 Speculative Grade Liquidity Rating reflects adequate liquidity over the next 12-15 months. Constraining Rice's liquidity profile is its high level of cash flow outspending, as Rice will outspend internally generated cash flow through at least 2016, depleting its cash balances and increasing its reliance on its revolvers to fund project based capital expenditures, as well as provide for growing letters of credit needs for its firm transportation contracts. Supporting Rice's liquidity profile is strong sources of capital, with good revolver availability across the consolidated company, high cash balances, good projected covenant compliance, and alternative liquidity provided by its midstream business.

As of December 31, 2014, Rice had full availability under its $550 million borrowing base credit facility and $256 million in cash on the balance sheet. Rice's borrowing base credit facility has $1.5 billion of commitments, and we expect the borrowing base to grow as Rice ramps up its drilling program. The borrowing base revolving credit facility matures in January 2019, and requires that Rice maintain a minimum current ratio of 1.0x and a minimum interest coverage ratio of 2.5x. We expect Rice to remain well in compliance with these covenant ratios through mid-2016. Rice also has a $300 million revolver at Rice Midstream Holdings that is secured by its midstream assets, including the General Partner of its midstream MLP. The Midstream Holdings revolver matures in 2019 and has a maximum debt/EBITDA covenant of 4.25x and a minimum EBITDA/Interest covenant of 2.5x. Rice's midstream MLP, Rice Midstream Partners, also has a $450 million secured revolver (secured by the MLP's assets, but non-recourse to Rice). The MLP's revolver matures in 2019 and has a maximum debt/EBITDA covenant of 4.75x and a minimum EBITDA/Interest covenant of 2.5x. As of December 31, 2014, Rice has no cash drawings under any of its revolvers, but did have letters of credit of $67 million outstanding under its borrowing base revolver.

An upgrade could be considered if Rice successfully grows production at sound returns while also maintaining sufficient liquidity and debt/average daily production less than $25,000 per barrel of oil equivalent (boe)/day and retained cash flow/debt of at least 15%.

A downgrade is possible if debt to average daily production is sustained above $30,000 boe/day or liquidity tightens.

The principal methodology used in these ratings was Global Independent Exploration and Production Industry published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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