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S&P Raises Ratings on Sanchez Energy (SN) to 'B+', Outlook Stable

March 4, 2014 3:16 PM EST
Standard & Poor's Ratings Services said today it raised its corporate credit rating on Houston-based exploration and production (E&P) company Sanchez Energy Corp. (NYSE: SN) to 'B' from 'B-' and its ratings on the company's senior unsecured debt to 'B-' from 'CCC+'. The outlook is stable.

The upgrade reflects the successful execution of Sanchez's 2013 operating plan and resulting rapid growth in both production and reserves and our expectation that growth will continue in 2014, while maintaining strong financial performance such as expected funds from operations (FFO) to debt of about 45% and debt to EBITDA of about 2x. As a result, proved reserves grew almost 180% to about 59 million barrels of oil equivalent (mmboe) as of Dec. 31, 2013, with average fourth quarter production of more than 18,000 boe per day. Nevertheless, Sanchez's still-limited scale of operations, especially proved reserve size and short proved developed reserve life, will continue to limit our assessment of credit quality and is reflected in the negative "comparable rating analysis" modifier. For example, the average proved reserve size is about 170 mmboe for a 'B+' rated E&P company and about 115 mmboe for a 'B' rated E&P company.

"The stable outlook reflects our expectation that the company will continue to execute its drilling program in Eagle Ford while maintaining adequate liquidity and FFO to debt in excess of 40% over the next 12 months," said Standard & Poor's credit analyst Paul Harvey.

We could lower the rating if the company's operating performance and financial policy weakened such that we expected FFO to debt to fall to lower than 20% for a sustained period. Such a situation could occur if Sanchez's operational and well performance weakened such that production levels fell to about 16,000 barrels per day with no adjustment to capital spending. We could also lower ratings if Sanchez were to fail to maintain adequate liquidity, particularly given the high reinvestment needs of the E&P industry.

We could raise the ratings if the company were able to meaningfully increase its reserve size to be more consistent with 'B+' rated peers, which in 2012 averaged more than 100 mmboe, roughly 65% larger than Sanchez's year-end 2013 proved reserves of about 60 mmboe. In addition, we would also expect Sanchez to maintain FFO to debt of more than 30% and a proved developed reserve life of more than four years before an upgrade. The most likely scenario for this to occur would be for continued good execution of Sanchez's drilling program, combined with prudently financed acquisitions.


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