Rice Energy (RICE) Ratings Placed on Review for Upgrade at Moody's
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Moody's Investors Service, ("Moody's") placed the ratings of Rice Energy, Inc. under review for upgrade, including the B2 Corporate Family Rating (CFR), the B2-PD Probability of Default Rating (PDR), and the B3 senior unsecured notes rating following Rice's announced agreement to purchase Vantage Energy Inc. (Vantage, unrated) and its midstream gas gathering business, Vista Gathering LLC (Vista, unrated). Rice's SGL-2 Speculative Grade Liquidity Rating remains unchanged.
"With the acquisition of Vantage and Vista, Rice will nearly double its Marcellus acreage position and significantly increase its natural gas gathering capacity in the basin," said Vice President Senior Analyst, RJ Cruz. "Rice's leverage metrics will improve substantially based on our expectation that the company will fund over 85% of the transaction with equity and retire the existing debt at Vantage."
On Review for Upgrade:
..Issuer: Rice Energy, Inc.
.Corporate Family Rating, Review for Upgrade, currently B2
.Probability of Default Rating, Review for Upgrade, currently B2-PD
.Senior Unsecured Notes, Review for Upgrade, currently B3 (LGD5)
..Issuer: Rice Energy, Inc.
.Outlook, Rating Under Review From Stable
These rating actions were prompted by Rice's announcement yesterday that it will acquire Vantage and Vista for approximately $2.7 billion. The acquisition would nearly double Rice's Marcellus acreage to 179,000 net acres and would expand its drilling inventory in the play to more than 1,100 locations. Notably, Vantage's Marcellus acreage in Greene County, Pennsylvania is contiguous to Rice's existing footprint.
The acquisition is expected to close on or before November 15, 2016, subject to customary closing conditions. The review for upgrade of Rice's B2 CFR reflects Moody's expectation that the CFR will likely be upgraded to B1 at the close of the transaction. The review will focus on the combined entity's production and reserve base, hedge position, and Moody's evaluation of the company's cash flow and leverage metrics based on Moody's commodity price outlook when the transaction closes. Risks related to integration and future development of Vantage's upstream assets should be manageable given the acquisition is adjacent to Rice's acreage in the Marcellus. Moody's expects the review to conclude following the close of the transaction.
The review on the rating of the senior unsecured notes will consider the size of the revolving credit facilities committed borrowing base at the time the transaction closes relative to the senior notes outstanding in addition to Moody's expectations for future usage of the revolver. A significant increase in revolver borrowing capacity and/or expectations for revolver utilization could result in the senior unsecured notes rating being confirmed at B3 despite an upgrade of the CFR to B1.
The $2.7 billion transaction consists of two parts: (1) $2.1 billion for Vantage's upstream business and outstanding debt and (2) $600 million for Vista. Concurrent with the announcement of this transaction, Rice launched a $1 billion equity issuance to the public. Proceeds from that offering and $980 million equity issued directly to Vantage's owners will fund the upstream purchase ($1.4 billion) and retire Vantage debt, approximately $700 million. At the same time, Rice Midstream Partners LP (RMP) will do a $250 million equity offering or issue $250 million units to Rice and will draw $350 million on its revolver to fund the acquisition of Vista.
The acquisition is sizeable and would increase Rice's current production levels by over 50%. Reserves would more than double from year-end 2015 level. Moreover, the acquisition of Vista will increase Rice's midstream throughput, solidifying its position as a leading gas gatherer in the Marcellus.
Given the largely equity financed nature of the transaction, Moody's expects Rice's cash flow and leverage metrics to improve substantially. Moody's expects Rice's Retained Cash Flow/Debt to improve to over 25% by year-end 2017 from 11.3% for the 12 months ending June 30, 2016, consolidated for Rice's midstream businesses. Moody's also expects E&P Debt/Average Daily Production to decline to under $8,000/boe from approximately $11,800/boe at June 30, 2016.
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