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Rating Action:

Moody's assigns B2 CFR to Ultra Resources; stable outlook

07 Oct 2020

New York, October 07, 2020 -- Moody's Investors Service ("Moody's") assigned ratings to Ultra Resources, Inc. (Ultra), including a B2 Corporate Family Rating (CFR), a B2-PD Probability of Default Rating (PDR) and a B2 rating to its senior secured first lien revolving credit facility. The rating outlook is stable. These are first time ratings for Ultra, following its emergence from bankruptcy.

"Ultra benefits from having no debt after emerging from bankruptcy and could generate meaningful positive free cash flow as it pursues a consolidation strategy," commented James Wilkins, Moody's Vice President-Senior Analyst. "However, the company could be challenged to restart drilling operations and maintain flat or growing production volumes if natural gas prices do not improve materially."

Assignments:

..Issuer: Ultra Resources, Inc.

.... Probability of Default Rating, Assigned B2-PD

.... Corporate Family Rating, Assigned B2

....Senior Secured 1st Lien Revolving Credit Facility, Assigned B2 (LGD3)

Outlook Actions:

..Issuer: Ultra Resources, Inc.

....Outlook, Assigned Stable

RATINGS RATIONALE

Ultra's B2 CFR reflects its ongoing suspension of drilling operations and choice to develop its inventory under potentially more favorable commodity price conditions in the future. It is unknown when it will restart drilling, but in the meantime Ultra expects to generate positive free cash flow while experiencing a 10-20% per year decline in production volumes from existing producing wells over the next four years. The company's strategy is to pursue consolidation through acquisitions of producing assets. It will need to restart drilling to arrest the ongoing production decline. It is uncertain when or to what extent natural gas prices will support further investment in Ultra's Pinedale assets, and how successful Ultra may be in potentially diversifying its E&P efforts into other basins. Moody's expects Ultra will eventually add modest levels of debt to its unlevered balance sheet as it invests in drilling new wells and producing asset transactions, and potentially to provide returns for its private shareholders, who were secured lenders to Ultra Resources, Inc. prior to its bankruptcy filing.

The rating is constrained by Ultra's modest scale, geographic concentration of reserves that are principally in a single basin and natural gas production focus. Ultra's cash flows will be highly levered to weak and range-bound natural gas. However, an active hedging program will limit volatility of cash flow.

Ultra benefits from low leverage (no long-term debt), positive free cash flow generation, a known resource base in the Pinedale Field with ample drilling inventory and competitive development costs and significant experience operating in the Green River Basin. As of the end of September 2020, the company had a net cash position with no balance sheet debt and an undrawn $60 million revolving credit facility. Furthermore, until Ultra restarts its drilling operations, it will have very low capital expenditure requirements and generate positive free cash flow, which may be used to reinvest in its existing business, acquire additional assets or pay distributions to equity holders, subject to certain covenant restrictions.

The first lien secured revolving credit facility is rated B2, the same level as the B2 CFR, and reflects the senior secured nature of revolver borrowings, lack of other debt in the liability structure as well as the small amount of lease obligations and trade payables. Moody's believes the B2 rating on the secured revolving credit facility is more appropriate than the rating suggested by Moody's Loss Given Default (LGD) methodology.

Ultra has good liquidity supported by positive free cash flow, a growing cash balance and availability under its undrawn $60 million revolving credit facility. The revolver, which matures in September 2023, had an initial borrowing base of $100 million and Moody's expects the revolver will remain undrawn while capital expenditures remain low. To reduce volatility of cash flow, Ultra will be required to hedge at least 33% of its next twelve months of PDP production volumes and 25% of PDP volumes for six months thereafter. The revolving credit facility currently has two financial covenants -- a minimum current ratio of 1.0x and a maximum leverage ratio of 3.0x. Moody's anticipates Ultra will remain in compliance with the financial covenants through 2021. Substantially all of the company's assets are pledged as security under the credit facility, which limits the extent to which asset sales could provide a source of alternative liquidity.

The stable outlook reflects Moody's expectation Ultra will be able to weather potential volatility in natural gas commodity prices and generate positive free cash flow while it is not conducting drilling operations.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if Ultra restarted drilling operations and maintained flat or growing production volumes above 100 Mboe per day, while generating positive free cash flow and maintaining retained cash flow (RCF) to debt of at least 35%. The ratings could be downgraded if Ultra ceased generating positive free cash flow, retained cash flow to debt fell below 25%, or production volumes fell below 50 Mboe per day.

Ultra Resources, Inc., headquartered in Englewood, Colorado, is a wholly owned subsidiary of UP Energy, LLC. Ultra is an independent exploration and production (E&P) company engaged in US natural gas exploration, development, and production in the Green River Basin of Wyoming (Pinedale Anticline and Jonah Field). Over 90% of the company's production consists of natural gas.

The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

James Wilkins
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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