S&P Downgrades Laredo Petroleum (LPI) to 'B'; Notes Lower Oil, Nat Gas Price Assumptions

Standard & Poor's Ratings Services lowered its corporate credit rating on Laredo Petroleum Inc. (NYSE: LPI) to 'B' from 'B+'. The outlook is stable.

At the same time, we lowered our issue-level ratings on the company's senior unsecured debt to 'B-' from 'B'. The recovery rating on this debt remains '5', indicating our expectation of modest (upper half of the 10% to 30% range) recovery in the event of a payment default.

"The downgrade reflects our reduced oil and natural gas price assumptions and our resulting estimates for higher debt leverage in 2016 and 2017," said Standard & Poor's credit analyst Daniel Krauss. "As a result, we have revised Laredo's financial risk profile assessment to highly leveraged from aggressive," he added.

We assess Laredo's business risk profile as weak, reflecting our view of the company's small and concentrated reserve base with a high percentage classified as proved-undeveloped and its participation in the highly competitive, capital-intensive, and cyclical oil and gas E&P industry. We view Laredo's liquidity as adequate.

The outlook is stable. Based on our scenario forecasts, we expect that credit measures will weaken materially over the next one to two years, given the depressed commodity pricing environment. In our base case scenario, we forecast that weighted average credit measures will weaken into the highly leveraged band, with debt to EBITDA exceeding 5x and FFO/debt approaching 12%. We expect that the company will continue to preserve its adequate liquidity position, despite potential drops in the borrowing base at 2016 redeterminations.

We would consider a downgrade within the next year if the company faced material liquidity issues that limited its access to capital to fund its growth or if FFO to debt dropped to below 10% and debt to EBITDA exceeded 6.5x for a sustained period. We believe this could occur under a scenario in which capital spending remains aggressive but production falls well short of expectations or is delayed for an extended period.

The potential for an upgrade over the next year is limited by the company's geographic concentration and financial sponsor ownership at above 40%. We could consider an upgrade if the company's financial sponsor ownership dropped below 40% and if we expected the company would be able to maintain FFO to debt at about 15% and debt to EBITDA of below 5x on a sustained basis.

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