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Rating Action:

Moody's changes Berry Petroleum's outlook to negative

06 Apr 2020

New York, April 06, 2020 -- Moody's Investors Service, ("Moody's") affirmed Berry Petroleum Company, LLC's (Berry) B2 Corporate Family Rating (CFR), its B2-PD Probability of Default Rating (PDR), and the B3 rating on Berry's unsecured notes. The outlook was revised to negative from stable.

The rating action reflects Moody's expectation that Berry should be able to limit its production decline in 2020 to a modest amount, despite cutting capital spending by about 70% from the 2019 level. However, production declines would likely accelerate in 2021 if prices and capital spending remain low, further pressuring cash flow. Berry's financial metrics could deteriorate significantly if very low oil prices extend into 2021, when the company's hedge position weakens considerably.

Affirmations:

..Issuer: Berry Petroleum Company, LLC

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

.... Corporate Family Rating, Affirmed B2

....Senior Unsecured Notes, Affirmed B3 (LGD5)

Outlook Actions:

..Issuer: Berry Petroleum Company, LLC

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

Berry's B2 CFR reflects its modest size, limited asset diversification, and relatively high cost production using thermal oil recovery. The company benefits from low absolute debt levels and leverage, and a steady production profile in its low-decline oil assets in California's San Joaquin Basin. A severe decline in oil prices in March, likely to persist through much of 2020, has led Berry to cut capital spending to very low levels, which should lead to modest production declines. The company benefits from a strong commodity price hedging program, which will allow it to maintain its good liquidity position into 2021. Leverage is low and should remain so, supported by management's conservative financial policies (the company targets a long-term, through the cycle leverage ratio between 1.0x and 2.0x) and positive free cash flow generation.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The E&P sector has been one of the sectors most significantly affected by the shock given its sensitivity to demand and oil prices. More specifically, the weaknesses in Berry's credit profile have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and Berry remains vulnerable to the outbreak continuing to spread and oil prices remaining weak. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Berry of the breadth and severity of the oil demand and supply shocks, and the broad deterioration in credit quality it has triggered.

Moody's expects Berry will maintain good liquidity into early 2021. Liquidity is supported by an excellent oil price hedge position for the remainder of 2020 which will deliver significant free cash flow given the company's substantially reduced 2020 capital program. Berry also benefits from an essentially undrawn $400 million revolving credit facility. The company has taken several measures to preserve liquidity in the face of very weak oil prices, including suspending its dividend (an annual cash saving of almost $40 million), cutting capital spending by about 70% year over year and aggressively reducing G&A.

The revolving credit facility expires in July 2022 and has two maintenance financial covenants -- a maximum leverage ratio of 4.0x and minimum current ratio of 1.0x. We expect Berry to remain well within the stated covenant limits into early 2021. After the revolver, the company's next debt maturity is on its senior unsecured notes in 2026.

The $400 million senior unsecured notes due 2026 are rated B3, one notch below the B2 CFR, reflecting the notes' more junior priority of claim on assets relative to borrowings under the secured revolving credit facility.

The negative outlook reflects the potential Berry's financial metrics could deteriorate materially if low oil prices persist into 2021.

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

Ratings could be downgraded if RCF/debt falls below 15%, capital efficiency deteriorates, or the company begins purchasing its unsecured notes at deeply discounted prices.

Although unlikely in the near term, ratings could be upgraded if the company can grow production to in excess of 40 Mboe/d while maintaining strong financial metrics.

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.

Berry Petroleum Company, LLC, based in Dallas, Texas, a wholly-owned subsidiary of Berry Petroleum Corporation (NASDAQ: BRY) is an independent oil & gas exploration and production company with operations focused in California's San Joaquin Basin.

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.

At least one ESG consideration was material to the credit rating outcome announced and described above.

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.

John Thieroff
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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​
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