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Rating Action:

Moody's assigns B1 CFR to Encino, rates second lien term loan B2

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.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.

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​
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