Moody's Upgrades Sanchez Energy (SN) to 'B3'; Outlook Stable
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Moody's Investors Service (Moody's) upgraded Sanchez Energy Corporation's (NYSE: SN) Corporate Family Rating (CFR) to B3 from Caa1, Probability of Default Rating (PDR) to B3-PD from Caa1-PD, and its senior unsecured notes to Caa1 from Caa2. The Speculative Grade Liquidity Rating (SGL) was raised to SGL-1 from SGL-2. The rating outlook is stable.
"The ratings upgrade reflects Sanchez's successful efforts to improve its liquidity through various asset sales that will support a drilling program leading to single digit production growth in 2017," said Moody's Assistant Vice President, Morris Borenstein.
Issuer: Sanchez Energy Corporation
Corporate Family Rating to B3 from Caa1;
Probability of Default Rating to B3-PD from Caa1-PD;
Senior unsecured notes upgraded to Caa1 (LGD4) from Caa2 (LGD4);
Speculative Grade Liquidity Rating to SGL-1 from SGL-2;
Rating outlook, remains at stable.
Sanchez's B3 Corporate Family Rating (CFR) reflects its single basin concentration in the Eagle Ford Shale, and high debt levels relative to profitability, cash flow, and proved developed (PD) reserves. Moody's expects earnings and metrics to weaken modestly next year due to lower realized prices as higher priced hedges roll off. However, Sanchez's cost structure is much improved and the company will focus drilling primarily on its highest return acreage in Western Catarina, that will account for the majority of its production volumes in 2017. Additionally, reinforced cash balances through various asset sales should be sufficient to accommodate a moderate increase in drilling activity over 2016 levels without revolver usage. Moody's believes the company will look to grow through accretive acquisitions and organically through increased production. With limited midstream assets in its portfolio, Moody's believes any future asset sales will be focused on acreage divestitures or mature producing assets.
Sanchez's SGL-1 Speculative Grade Liquidity Rating reflects very good liquidity, supported by its strong cash balance of more than $500 million, pro forma for the asset sale to Carrizo, its undrawn $300 million committed revolver, and no near term covenant issues. Moody's expects free cash flow to be negative over the next few years as capital spending exceeds projected operating cash flow. Approximately 40% of the company's projected oil volumes are hedged for 2017 and approximately 85% on natural gas based on modest production growth over 2016.
The revolver expires June 30, 2019 and is subject to a borrowing base redetermination in the spring and fall of 2017. Moody's does not anticipate the revolver will be drawn in 2017. The credit agreement includes a maximum senior secured leverage covenant of 2.0 times (revolver is currently the only secured debt in capital structure) as well as a current ratio of 1 times. Moody's expects ample cushion under the covenants over the SGL period. The company has no bond maturities until 2021. Substantially all of Sanchez's assets are pledged as security under the credit facility.
The $1.75 billion senior unsecured notes are rated Caa1, one notch below the B3 CFR given the superior position of the $300 million elected commitment amount under its borrowing base in the capital structure that has a first-priority claim to substantially all of Sanchez's assets. Moody's expects Sanchez to grow its secured debt, so we believe that the Caa1 rating is more appropriate for the notes than the rating suggested by the Moody's LGD Methodology.
The ratings could be downgraded should EBITDA to interest coverage be sustained below 1.5 times or if liquidity materially deteriorated. A ratings upgrade could be considered if Sanchez improves RCF to debt above 10% and EBITDA to interest expense above 2 times on a sustained basis.
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