TEXT-S&P revises Perpetual Energy outlook to negative1:27PM ET on Tuesday Feb 14, 2012 by Thomson Reuters (The following statement was released by the rating agency)
-- Depressed natural gas prices will continue to negatively affect Perpetual Energy Inc.'s operating cash flow.
-- We believe this will cause Perpetual's near-term credit measures to decline, despite a reduction in the company's capital investment.
-- We are revising our outlook on the company to negative from stable.
-- We are also affirming our 'B' long-term corporate credit and 'B-' senior unsecured debt ratings on Perpetual.
-- The '5' recovery rating on the notes is unchanged.
-- Unless the company can increase its liquid production and cash flow significantly without deteriorating its balance sheet or already less-than-adequate liquidity, we could lower the ratings.
Feb 14 - Standard & Poor's Ratings Services today said it revised its outlook on Alberta-based Perpetual Energy Inc. to negative from stable. At the same time, Standard & Poor's affirmed its 'B' long-term corporate credit and 'B-' senior unsecured debt ratings on the company. The '5' recovery ratings on the notes is unchanged. "The outlook revision reflects our expectation that Perpetual's cash flow will continue to deteriorate through 2012, due to sustained weak natural gas prices, lack of high-priced gas hedges, and the company's high levered costs," said Standard & Poor's credit analyst Aniki Saha-Yannopoulos. As of Feb. 10, 2012, spot AECO gas prices were C$2.23 per thousand cubic feet. At the same time, gas hedges put in place range from C$2.20-C$3.72 per gigajoule, which we expect to limit cash flow. At our price deck, we expect Perpetual to exit 2012 with debt-to-EBITDAX above 6x and less-than-adequate liquidity. In addition, the company's C$75 million convertibles C mature in June 2012, which it plans to settle with asset sales and borrowings under the revolver, if necessary, and could stress its less-than-adequate liquidity. The ratings reflect what Standard & Poor's views as the company's limited and small reserve base, meaningful exposure to low natural gas prices, worsening credit measures, and less-than-adequate liquidity. In addition, we base the ratings on Perpetual's operations in a highly cyclical, capital-intensive, and competitive industry. The ratings also reflect our view of the company's growth prospects from the Mannville heavy oil play. As of Sept. 30, 2011, Perpetual had about C$715 million in adjusted debt, which includes C$75 million in convertible debentures maturing June 2012 and asset-retirement obligations. The company's geographic diversity is limited and we don't expect it to improve materially in the near term. As of 2011, Perpetual had a small reserve base of approximately 235 billion of cubic feet equivalent (gross, 88% natural gas, 84% proved developed). Its proved reserve life is 4.6 years and proved developed reserve life at 3.9 years, which is shorter than those of its land-focused peers (5-7 years). We expect the company's production to decline 5%-15% through 2012, due to its budgeted C$65 million capital plan for 2012 being lower than its maintenance capital of C$85 million. Perpetual's production for third-quarter 2012 was about 135.5 million cubic feet equivalent per day; its production is mostly from its shallow conventional natural gas assets in Alberta, especially in the eastern district. The negative outlook reflects Standard & Poor's concern that Perpetual's credit measures will continue to deteriorate due to weak natural gas prices. We assume the company will continue focusing on increasing its liquids production, while funding capex and convertible maturity through cash flow and asset sales. The outlook also incorporates our expectations that Perpetual's financial metrics will remain weak through 2012 and it will maintain its liquidity (about C$60 million). Given the company's reserves and production, there is little likelihood of an upgrade during the period of weak natural gas prices. A negative rating action could occur if debt-to-EBITDA deteriorates above 6.5x million due to operational issues or if its liquidity (cash on hand and availability under the revolver) decreases below C$25 million, should Perpetual need to settle the convertibles through borrowings under the revolver. RELATED CRITERIA AND RESEARCH
-- Key Credit Factors: Global Criteria For Rating The Oil And Gas Exploration And Production Industry, Jan. 20, 2012
-- Standard & Poor's Lowers Its Natural Gas Price Assumptions; Oil Prices Unchanged, Jan. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Recovery: Criteria Guidelines For Recovery Ratings On Global Industrials Issuers'