Ultra Resources Inc. Rated #B+#; Outlook Secured Debt Rating #BB#; Unsecured Debt Rated #BB-#Stocks and Financial Services Press Releases Friday March 17, 2017 09:06
At the same time, we assigned issue-level ratings to debt offered by Ultra's subsidiary, Ultra Resources Inc. We assigned a 'BB' issue-level rating to the company's proposed secured first-lien $600 million term loan. The recovery rating is '1', indicating our expectation of very high (90%-100%; rounded estimate: 95%) recovery for creditors in the event of a payment default.
We also assigned a 'BB-' issue-level rating to the company's proposed $1.4 billion unsecured notes. The recovery rating is '2', indicating our expectation of substantial (70%-90%; rounded estimate: 85%, capped) recovery in the event of a payment default.
Our rating incorporates Ultra's planned capital structure following reorganization through Chapter 11 bankruptcy, which converts approximately $1.3 billion of holding-company debt to equity. Ultra intends to issue $2 billion in new debt to fund repayment to its credit facility lenders, its operating company noteholders, and other claims. We note that, unusual for bankruptcies, the plan results in operating company creditors receiving full repayment in cash.
We view Ultra's business risk as fair. The company is a midsize oil and gas E&P company with primarily dry natural gas operations in Wyoming (the Pinedale and Jonah fields). At year-end 2016, Ultra's proved reserve base using strip pricing was 5.8 trillion cubic feet equivalent (tcfe), 92% of which was natural gas and 45% classified as proved developed. Under Securities and Exchange Commission (SEC) rules, which did not permit booking proved undeveloped (PUD) reserves in 2016 due to concerns over funding development to bankruptcy, proved reserves were 2.6 tcfe at the end of 2016. Production in 2016 averaged 772 million cubic feet equivalent per day (mmcfe/d), and we expect full-year production to average around 790 mmcfe/d. Natural gas from the Pinedale field accounts for almost all of Ultra's production, which we expect to continue.
While Ultra has a large proved reserve base, we view its limited geographic and production diversification--in addition to PUDs representing a high proportion of total reserves--as negative credit factors. Approximately 93% of the company's production is from the Jonah and Pinedale fields in Wyoming, 5% from Marcellus Formation shale in Pennsylvania, and less than 2% from the Uinta Basin. We expect Ultra to concentrate on developing its Wyoming properties this year due to better economics than at the Marcellus and Uinta Basin sites.
The company has a high degree of operating efficiency, with cash operating costs among the lowest of rated peers at $1.03 per mcfe in 2016. Historical finding and development costs are skewed by very large negative price-related
revisions in 2015 and limitations on booking reserve additions in 2016 because of bankruptcy. We expect F&D costs to be comparable with the $0.70 per mcfe level recorded in 2015 (excluding price-related revisions), which we view as competitive. The company develops its Pinedale acreage through vertical wells that are less expensive than horizontal wells typical of shale drilling, though production and recoveries are lower. Ultra also benefits from relatively benign basis differentials in the Rockies, where transportation capacity exceeds regional production by a wide margin. As a result, the company has a profitability advantage over most of its Marcellus peers.
We assess Ultra's financial risk profile as aggressive. Given our price assumptions, our forecast leverage measures include funds from operations (FFO) to debt of about 24% and debt to EBITDA of about 3.5x at year-end 2017. We also expect the company to outspend internally generated cash flow over the next two years. We note that our FFO forecast incorporates nonrecurring settlement payments totaling about $240 million.
The company's geographic and commodity concentrations lead us to assess its volatility of cash flow as high. While Ultra does not have hedges in place, we expect the company to hedge a significant portion of expected production after emergence from bankruptcy, providing a measure of cash flow protection.
The stable outlook reflects our expectation that the company will maintain moderate leverage as it develops its Pinedale properties and will maintain adequate liquidity. We expect Ultra's leverage to remain in the 20%-30% FFO-to-debt range over the next two years while increasing production.
We could raise our ratings on Ultra if leverage improves such that our forecast FFO to debt consistently remains above 30%. This would most likely occur if the company executes its development plan, increasing production while maintaining moderate leverage. We could also raise our ratings if Ultra improves its geographic and commodity diversification and reduces PUD concentration.
We could lower the rating if we expect leverage to weaken such that our forecast FFO to debt remains below 12% for a sustained period. This would most likely occur if the company outspends cash flows by more than we anticipate, or if commodity prices weaken below our current assumptions.
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