S&P Cuts Penn Virginia (PVA) to 'B'; Sees Risk Profile Becoming 'Highly Leveraged'

Standard & Poor's Ratings Services lowered the corporate credit rating on Penn Virginia Corp. (NYSE: PVA) to 'B' from 'B+'. The outlook is stable.

At the same time, we lowered our ratings on the company's senior unsecured debt to 'CCC+' from 'B'. The recovery rating on the debt remains '6', which indicates our expectation for negligible (0% to 10%) recovery in the event of a default.

"The downgrade reflects the impact of weakening commodity price assumptions, which resulted in a deterioration of Penn Virginia's expected financial and profitability measures," said Standard & Poor's credit analyst David Lagasse.

Under Standard & Poor's assumptions, we now expect debt to EBITDA to exceed 5x on average, consistent with a "highly leveraged" financial risk profile, as defined by our criteria. Additionally, profitability measures are decreasing and are approaching a "below average" assessment. Nevertheless, profitability measures reflect historical drilling costs, which were based on very tight rig and completion equipment market. We base our assessment of Penn Virginia's "weak" business risk on its participation in the cyclical and capital-intensive E&P industry and the relatively modest size of the company's reserves. Based on resulting financial measures, we assess Penn Virginia's financial risk profile as "highly leveraged" and liquidity as "adequate," as defined by our criteria

The stable outlook reflects Standard & Poor's view that credit measures will remain in line with our assumptions over the next 12 to 18 months with average debt to EBITDA above 5x in 2016 and average FFO to debt approaching 12% due to current weak commodity prices.

We could lower ratings if we expect FFO to debt to be sustained below 12% and we assess profitability as "below average." Such an event could occur if expected crude oil prices were sustained below $60/bbl for a prolonged period. This could occur if Penn Virginia is unable to benefit from declining operating costs, and/or expected improvements in prices, such that it lags industry trends.

We could raise the ratings if we expected debt to EBITDA to be sustained below 5x FFO to debt were to average comfortably above 12% for a sustained period, and profitability remains "average." Such an event could occur if expected crude oil prices were sustained above $60/bbl, likely in conjunction with the benefit of moderate drilling and completion costs.

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