S&P Lowers Corp. Rating on Energen (EGN) to 'BB'; Outlook Stable

Standard & Poor's Ratings Services said it lowered its corporate credit rating on Energen Corp. (NYSE: EGN) to 'BB' from 'BBB-'. We also removed the rating from CreditWatch, where we placed it with negative implications on April 9, 2014. The rating outlook is stable.

At the same time, we lowered all related issue-level ratings on the Energen's debt by two notches in conjunction with the downgrade. The recovery rating is '3', reflecting our expectation of meaningful (50% to 70%) recovery in the event of a payment default. We also assigned our 'BBB-' issue rating to Energen's new $2.5 billion secured credit facility, with lender commitments of $1.5 billion. The recovery rating on the facility is '1' reflecting our expectation of very high (90% to 100%) recovery in the event of a payment default.

The downgrade follows Energen's announcement that it has closed the sale of its regulated gas distribution utility, Alagasco.

"We view the sale as reducing Energen's cash flow diversity and stability. Following the sale, the company is now exclusively an oil and gas E&P company," said Standard & Poor's credit analyst Ben Tsocanos. "We view the E&P industry as higher risk than the regulated utility industry due to the oil and gas business' capital intensity and exposure to commodity price volatility. We note that proceeds from the sale of Alagasco greatly enhance Energen's capacity to fund development of its oil and gas producing properties and to repay debt."

The stable outlook reflects our expectation that Energen will maintain FFO to debt above 60% and debt to EBITDA below 1.5x while investing heavily in development of its oil-rich Permian properties.

We could lower ratings if development spending fails to result in expected increases in liquids production or if management were to pursue more aggressive spending plans, resulting in FFO to debt falling to less than 60% on an ongoing basis under our commodity price assumptions.

We could raise ratings if Energen continues to add proved reserves and increase liquids production to levels more comparable to higher-rated peers, while maintaining moderate credit measures and adequate liquidity. Successful development of properties outside of the Permian basin, thereby increasing geographic diversification, could also result in a more favorable assessment of Energen's business risk.

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