S&P Cuts Warren Resources' (WRES) Rating to 'CCC+'; Notes Reduced Oil, Nat Gas Assumptions

Standard & Poor's Ratings Services today lowered its corporate credit rating on Warren Resources Inc. (Nasdaq: WRES) to 'CCC+' from 'B-'. The outlook is negative.

At the same time, we lowered our issue-level ratings on the company's senior unsecured debt to 'CCC-' from 'CCC+'. We revised the recovery rating to '6' from '5', indicating our expectation of negligible (0% to 10%) recovery for creditors if a payment default occurs.

"The downgrade reflects our reduced oil and natural gas price assumptions, which we expect will likely lead to much weaker earnings and credit measures for Warren in 2015 and 2016," said Standard & Poor's credit analyst Daniel Krauss. "We now estimate Warren Resources' adjusted funds from operations to debt will drop to the low- to mid-single-digit percentage range in 2015," he added.

Additionally, we believe that the company's borrowing base will be reduced as part of its upcoming redetermination at the end of April, given our expectation that banks will be using a lower price deck and that the company was not adequately hedged for 2015. We expect that management will remain proactive in preserving its liquidity position, potentially through asset sales or other capital-raising measures.

The ratings on Warren reflect our view of the company's "vulnerable" business risk and "highly leveraged" financial risk. We view Warren's liquidity as "less than adequate," based on our estimate that liquidity sources will be less than 1.2x liquidity uses over the next 12 to 18 months.

The negative outlook reflects our view that credit measures will weaken materially in 2015, approaching levels we would view as unsustainable. Additionally, we believe that liquidity could become pressured as a result of the upcoming re-determination of the company's borrowing base. We would expect that management's main focus would be to enhance the company's liquidity position, potentially through divestitures of noncore assets.

We could lower the rating within the next few months if a significant drop in availability under the borrowing base prompted us to revise our liquidity assessment to "weak." We could also lower the ratings if we anticipated that a breach of Warren's financial covenants were imminent, and did not expect the company could successfully negotiate relief.

We would consider revising the outlook to stable if Warren is able to reduce leverage from expected 2015 levels while improving its liquidity position.

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