TEXT-S&P cuts Penn Virginia Corp ratings

Wed Mar 14, 2012 2:32pm GMT
 

Overview	
     -- We expect U.S. exploration and production (E&P) company Penn Virginia 	
Corp.'s liquidity and credit metrics to erode despite its strategy to
expand 	
its oil and liquids-based production amid soft natural gas prices.	
     -- We are lowering our long-term corporate credit rating on Penn Virginia 	
to 'B' from 'BB-'. We are lowering our issue rating on Penn Virginia's senior 	
unsecured debt to 'B' from 'BB-'.	
     -- The negative outlook reflects our concerns over the group's 	
"less-than-adequate" liquidity profile, as our criteria define the term.	
	
Rating Action	
On March 14, 2012, Standard & Poor's Ratings Services lowered its corporate 	
credit and senior unsecured debt ratings on Radnor, Pa.-based Penn Virginia 	
Corp. (PVA) to 'B' from 'BB-'.	
	
At the same time, we lowered our issue rating on PVA's senior unsecured debt 	
to 'B' from 'BB-'. The recovery rating remains '3', indicating our expectation 	
of meaningful recovery (50% to 70%) in the event of a payment of default.	
	
Rationale	
The downgrade reflects our expectation that PVA's liquidity and financial 	
measures will weaken as a result of depressed natural gas prices and the 	
significant capital expenditures needed to execute the company's strategy to 	
shift to liquids-based production. We believe the company could face funding 	
and capital market access issues in 2013 if its drilling strategy is 	
unsuccessful.	
	
The ratings on Penn Virginia Corp. (PVA) reflect what we view as the company's 	
"aggressive" financial risk and "vulnerable" business risk (as defined by our 	
criteria). Natural gas still constituted more than 70% of the group's 	
production and reserves in 2011 and, although the company's exposure to oil 	
and natural gas liquid is growing, the shift to a liquids-based production 	
requires substantial drilling expenses in the short-term. PVA's thinning 	
liquidity, relatively small scale, and higher-than-average cost structure 	
relative to other natural gas-weighted companies compound the difficulties of 	
soft natural gas prices. 	
	
As of Dec. 30, 2011, adjusted debt leverage was over 3.2x, which is aggressive 	
but appropriate for the rating category. However, based on our current price 	
assumptions of $3.00 per million Btu natural gas in 2012 and 2013 and $80 and 	
$70 per barrel of West Texas Intermediate crude oil (WTI) respectively, for 	
2012 and 2013, adjusted debt leverage will increase to about 3.4x at year-end 	
2012 and over 4x the following year. The deterioration in credit metrics 	
primarily reflects significant cash outflows to fund the company's drilling 	
program to increase its production of oil and liquids in the next couple of 	
years. We expect that PVA will spend $300 million to 330 million per year in 	
capital expenditures in 2012 and 2013, most of which will be spent in the 	
oil-rich Eagle Ford shale. These numbers are significantly above the group's 	
funds from operations, which we anticipate to be $150 million to $180 million.	
	
PVA is an independent oil and gas company whose primary business is the 	
exploration, production, and development of natural gas and oil reserves in 	
Texas, the Mid-Continent, Appalachia, and Mississippi. PVA's reserve base at 	
year-end 2011 was 883 billion cubic feet equivalent (bcfe), which is in line 	
with peers in the 'B' rating category. Although the company's production of 	
oil and liquids increased 35% and 81%, respectively, in 2011, the company is 	
still among the most weighted toward natural gas compared with rated peers. 	
Production in 2011 consisted of 72% natural gas (down from 78% of production 	
in 2010), 12% natural gas liquids (NGLs), and 16% crude oil. If the company 	
can successfully execute its drilling program in the Eagle Ford, its possible 	
oil and liquids could represent more than 50% of production at year-end 2013. 	
Although better than 2010 results, the company's lease operating costs of 	
about $1.12 per mcfe and cash, general, and administrative expenses per mcfe 	
of about $0.83 in 2011, were elevated compared with other E&P companies.	
	
Liquidity	
We assess PVA's overall liquidity as "less than adequate", as the company's 	
sources of liquidity (including cash, facility availability, and funds from 	
operations) should cover its uses by only 1x to 1.2x in 2012. Our assessment 	
incorporates the following expectations and assumptions:	
     -- As of Dec. 30, 2011, PVA had cash and cash equivalents of 	
approximately $7.5 million.	
     -- $199.6 million in availability under its $300 million committed 	
revolving credit facility as of Dec. 31, 2011 ($380 million borrowing base), 	
which matures in August 2016. The borrowing base will depend on natural gas 	
prices-if prices remain low, this could reduce the borrowing base. 	
     -- The company should comply with its current financial covenants, 	
including a leverage ratio of 4.5x.	
     -- The company will spend close to $300 million in capital expenditures 	
this year.	
	
Recovery analysis	
The issue-level rating on PVA's senior unsecured notes is 'B'. The recovery 	
rating is '3', indicating our expectation of meaningful (50% to 70%) recovery 	
in the event of a payment default. For the full recovery analysis, please see 	
the recovery report on Penn Virginia, published on May 13, 2011, on 	
RatingsDirect. 	
	
Outlook	
The outlook is negative reflecting our concerns regarding the company's 	
less-than-adequate liquidity profile. We could lower the rating if 	
availability under the groups' revolving credit facility drops below $100 	
million. We could affirm the rating if the company takes further steps to 	
strengthen its liquidity. 	
	
	
Ratings List	
Downgraded	
                                        To                 From	
Penn Virginia Corp.	
 Corporate Credit Rating                B/Negative/--      BB-/Negative/--	
	
Penn Virginia Corp.	
 Senior Unsecured                       B                  BB-	
   Recovery Rating                      3                  3

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