S&P Upgrades PetroQuest Energy (PQ) to 'CCC'; Outlook Negative

October 21, 2016 12:35 PM EDT

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S&P Global Ratings today raised the corporate credit rating on PetroQuest Energy Inc. (NYSE: PQ) to 'CCC' from 'SD'. The outlook is negative.

At the same time, we assigned 'B-' issue-level and '1' recovery ratings to the company's newly-issued $50 million senior secured term loan. The '1' recovery rating indicates our expectation of very high (90% to 100%) recovery in the event of a payment default.

We also assigned a 'CCC' issue-level and '4' recovery rating to the company's $243 million second-lien secured PIK notes. The '4' recovery rating indicates our expectation for average (30%-50%; lower half of the range) recovery in the event of a payment default.

We are revising the recovery rating on the company's remaining senior secured second-lien notes to '4' from '3', reflecting our expectation for average (30%-50%; lower half of the range) recovery in the event of a payment default. The issue-level rating on the senior secured second-lien notes remains 'D'. The existing 'D' issue-level and '6' recovery ratings on the company's senior unsecured notes are unchanged. The '6' recovery rating indicates our expectation of negligible (0% to 10%) recovery in the event of a payment default.

"The upgrade reflects our reassessment of the company's corporate credit rating following the exchange of the majority of its outstanding 10% senior unsecured notes due September 2017 at par," said S&P Global Ratings credit analyst Daniel Krauss. The negative outlook reflects the company's current debt leverage levels, which we view to be unsustainable, as well as its less than adequate liquidity position.

We could consider a lower rating if we assess that the company has less than six months of liquidity. This could occur if weakening prices and production caused the company's PV-10 value to deteriorate, thus potentially limiting the company's ability to fully access the $50 million term loan due to covenant constraints, We could also lower the ratings if the company announces a capital restructuring, or fails to meet its interest obligations. Additionally, we would lower the ratings if the company announced any further debt exchanges, which we could view as distressed.

We could raise the ratings if the company is able to improve its liquidity position to a level we assess as adequate and addresses the upcoming September 2017 maturity of the remaining $23 million of senior unsecured notes.



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