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I AGREE
05 Sep 2018
$550 million of new debt rated
New York, September 05, 2018 -- Moody's Investors Service ("Moody's") assigned
first time ratings to Encino Acquisition Partners Holdings, LLC
(Encino), including a B1 Corporate Family Rating (CFR), a
B1-PD Probability of Default Rating (PDR), and a B2 rating
to the company's proposed $550 million senior secured second
lien term loan. The rating outlook is stable.
The proceeds from the term loan issuance will be used to fund a portion
of the purchase price paid to acquire Chesapeake Energy Corporation's
(Chesapeake, B3 RUR-up) Ohio Utica shale assets for approximately
$2.0 billion in cash. The remainder of the purchase
price will be funded by an equity contribution of approximately $1.1
billion from Canada Pension Plan Investment Board (CPPIB) and company
management and borrowings under an estimated $1.0 billion
senior secured revolving credit facility. EAP Ohio, LLC (100%
owned subsidiary of Encino) will own the acquired assets, and will
provide upstream guarantees to Encino, in addition to Encino's
security interest in the assets. Encino will be 100% owned
by Encino Acquisition Partners, LLC (EAP), which will be owned
by Encino Energy, LLC and CPPIB. There will be no debt obligations
at EAP.
"Encino's ratings reflect its relatively lower financial leverage,
its sizeable production and reserve base, and strong cash margins,
somewhat offset by the company's large firm transportation commitments
and status as a start-up joint venture between Encino Energy and
CPPIB without a prior history of operating together" commented Sreedhar
Kona, Moody's Senior Analyst. "Encino's strong hedge position
and our expectation that the company will grow production within operating
cash flow contribute to the stable outlook."
A complete listing of rating actions is as follows:
Assigned:
...Issuer: Encino Acquisition Partners Holdings,
LLC
...Corporate Family Rating, assigned B1
Probability of Default Rating, assigned B1-PD
Senior Secured Second Lien Term Loan, assigned B2 (LGD5)
Outlook, Stable
RATINGS RATIONALE
Encino's B1 CFR reflects the company's natural gas weighted
production profile which yields lower cash margins than an oil-weighted
production base on an equivalent unit of production, notwithstanding
the company's relatively low Lease Operating Expense (LOE) structure.
The rating also reflects the company's single basin focus and substantial
Firm Transportation (FT) commitments that, while providing flow
assurance, could prove burdensome if the company's production
drops. Additionally, Encino is the vehicle used for the initial
acquisition of the joint venture between Encino Energy and CPPIB,
and has no operating history as a stand-alone, independent
entity. Also, Encino will have a reserve base that is largely
proved undeveloped, which will require large cash outlays over time
to develop.
Encino benefits from its sizeable production and well-delineated
reserve base acquired from Chesapeake that provides a large de-risked
inventory of economic drilling locations throughout the commodity price
cycle, and the company's ability to grow production within
operating cash flow. The company also benefits from the proposed
conservative financial policy, evidenced by low financial leverage
and a substantial hedge position that mitigates cash flow volatility to
underpin the company's self-funding drilling program.
The company is also supported by an experienced management team with proven
track record and a long term investor CPPIB with strong history in natural
resources investments. The existing Chesapeake personnel operating
the Utica shale assets are expected to continue with the newly formed
Encino entity.
Encino's $550 million senior secured second lien term loan
maturing seven years from the closing of the transaction is rated B2,
one-notch below the CFR, reflecting the priority ranking
of the company's $1 billion borrowing base senior secured
RBL facility. However, given the substantial asset coverage
of debt and the second lien security interest of the term loan,
Moody's views the B2 rating to be more appropriate than the lower
rating suggested under Moody's Loss Given Default methodology.
Moody's expects Encino to maintain good liquidity. At closing,
Encino will have approximately $550 million available under its
borrowing base RBL facility, after accounting for borrowings to
fund a portion of the acquisition and letters of credit posted for pipeline
and midstream commitments. Moody's expects Encino to fully
fund its debt service costs and capital spending within operating cash
flow through 2019. Under the revolver agreement, Encino is
required to maintain a net debt/EBITDAX of less than 4x and a current
ratio of greater than 1x. Moody's expects Encino to maintain
compliance with its financial covenants. The company's Term
Loan agreement does not contain any financial maintenance covenants.
The stable outlook reflects Encino's strong hedge position and Moody's
view that Encino will continue to grow production within cash flow while
maintaining a strong balance sheet and good liquidity.
A ratings upgrade could be considered if the company can sustain production
above 150,000 boe/d while maintaining a conservative financial policy
and current credit metrics. The company must also demonstrate successful
execution of its growth strategy as an independent entity.
Ratings could be downgraded if the company's debt increases substantially
above the current levels or production declines materially such that debt/average
daily production is above $10,000, or if the retained
cash flow to debt falls below 20%. A downgrade could also
be considered if Encino's liquidity deteriorates significantly.
The principal methodology used in these ratings was Independent Exploration
and Production Industry published in May 2017. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
Encino is a privately-held Exploration and Production company formed
in 2017 through a joint venture between Encino Energy and CPPIB and is
based in Houston, TX.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Sreedhar Kona
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
No Related Data.
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