New York, July 01, 2020 -- Moody's Investors Service (Moody's) downgraded Denbury Resources Inc.'s
(Denbury) Probability of Default Rating (PDR) to Ca-PD from Caa2-PD,
Corporate Family Rating (CFR) to Ca from Caa2, ratings on its senior
secured second lien debt to Ca from Caa2 and ratings on its senior subordinated
debt to C from Ca. The SGL-4 Speculative Grade Liquidity
(SGL) Rating is unchanged. The rating outlook is negative.
"The downgrade of Denbury Resources' ratings reflects the high probability
the company will default on its debt obligations after it elected not
to make an approximately $8 million interest payment due on June
30th with respect to the 6-3/8% convertible senior notes
due 2024," commented James Wilkins, Moody's Vice President.
The following summarizes the ratings activity.
Downgrades:
..Issuer: Denbury Resources Inc.
.... Probability of Default Rating,
Downgraded to Ca-PD from Caa2-PD
.... Corporate Family Rating, Downgraded
to Ca from Caa2
....Senior Subordinated Notes, Downgraded
to C (LGD6) from Ca (LGD6)
....Senior Secured Notes, Downgraded
to Ca (LGD3) from Caa2 (LGD4)
Outlook Actions:
..Issuer: Denbury Resources Inc.
....Outlook, Remains Negative
RATINGS RATIONALE
The downgrade of Denbury's CFR to Ca following the missed interest payment
due on June 30th reflects Moody's expectation the company will default
on its debt obligations and the debt holders' recovery rate will
be low. (The company has a 30 day grace period to make the interest
payment before such non-payment constitutes an event of default
with respect to the convertible senior notes due 2024.) Moody's
believes Denbury has an untenable capital structure as a result of the
high leverage, limited options to refinance debt and a large interest
expense burden. Low oil commodity prices that have not allowed
the company to generate significant positive free cash flow and the need
to address $636 million (as of March 31, 2020) of notes maturing
in 2021 have contributed to the company's need to restructure its
balance sheet. Denbury shed nearly $1.3 billion in
debt since 2014, through debt exchanges, open market purchases
of debt at discounts to par and exercising the conversion option on its
convertible debt, but it continues to be challenged to generate
meaningful cash flow (retained cash flow to debt was less than 20%
for the twelve months ended March 31, 2020). Low commodity
prices, potential difficulty in selling assets, a PV-10
value of reserves at current oil prices below the par value of debt and
low bond trading prices suggest a low recovery rate for note holders.
The rapid spread of the coronavirus outbreak, deteriorating global
economic outlook, low oil prices, and high asset price volatility
have created an unprecedented credit shock across a range of sectors and
regions. Moody's regards the coronavirus outbreak as a social
risk under its ESG framework, given the substantial implications
for public health and safety. Today's action also reflects
the impact on Denbury of the deterioration in credit quality it has triggered,
given Denbury's exposure to oil demand and prices, which has
left Denbury vulnerable to shifts in market demand and sentiment in these
unprecedented operating conditions.
Denbury ratings also reflect its moderate scale and relatively high cost
enhanced oil recovery operations. The company's two areas of operation
(the US Gulf Coast and the Rocky Mountain region) produce over 95%
oil and offer some asset diversification. The enhanced oil recovery
operations, which account for more than 60% of production,
are more capital intense upfront, require longer lead times and
have higher operating costs, but also provide for a lower risk asset
base, with no exploration risk and long-lived reserves.
The company owns extensive CO2 supply infrastructure as well as CO2 reserves.
The senior secured second lien notes are rated Ca, the same level
as the Ca CFR. The $1.6 billion of secured second
lien debt, which accounts for a majority of Denbury's third party
debt, has a lower priority claim relative to the first lien secured
obligations under the revolving credit facility and more senior priority
claim relative to the unsecured subordinated debt (rated C, one
notch below the CFR) and senior unsecured convertible debt. Moody's
believes the Ca ratings on the secured notes are more appropriate than
the ratings suggested by Moody's Loss Given Default (LGD) methodology.
The C rating on the unsecured subordinated notes reflects the limited
prospects for recovery on the notes.
The SGL-4 Speculative Grade Liquidity Rating reflects weak liquidity,
driven by the high likelihood Denbury will default on the obligations
under its debt agreements after missing an interest payment on June 30th.
The company's primary sources of liquidity are its cash balances (following
the June 29th draw of $200 million from its revolving credit facility
due 2021) and cash flow from operations. Denbury's recent
$200 million borrowing on its revolving credit facility on June
29th, left it little borrowing capacity, but sufficient liquidity
to continue its operations, if it is relieved of its interest expense
burden and need to refinance debt maturing in 2021. The revolver
borrowing base is set at $615 million, but limited to $275
million (plus letters of credit) until the fall 2020 borrowing base redetermination.
The revolver matures in December 2021 (with springing maturities beginning
in February 2021, if the second lien notes due May 2021 are not
refinanced). The revolver had $95 million of letters of
credit outstanding as of June 30th. The credit facility's financial
covenants include a maximum total debt to EBITDA ratio of 5.25x
through December 31, 2020 (4.5x thereafter), maximum
senior secured debt to EBITDA ratio of 2.5x, a minimum interest
coverage ratio of 1.25x and a minimum current ratio of 1x.
The company has $585 million of senior secured second lien notes
maturing in May 2021 and $51 million of subordinated notes maturing
in August 2021.
The negative outlook reflects the likelihood the company will default
on its debt obligations as it restructures its debt.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded if asset values weaken further and Moody's
assessment of expected recovery worsens. Although unlikely,
an upgrade would be considered if Denbury refinances its debt maturing
in 2021 and 2022, and maintains interest coverage of at least 1.5x,
adequate liquidity as well as stable production.
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.
Denbury Resources Inc., headquartered in Plano, Texas,
is an independent oil and gas company with operations in the Gulf Coast
and Rocky Mountain regions. The company has a significant emphasis
on carbon dioxide enhanced oil recovery (CO2 EOR) operations used to recover
oil from mature fields.
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.
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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.
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JOURNALISTS: 1 212 553 0376
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