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Rating Action:

Moody's downgrades Denbury Resources' PDR to Ca-PD, sec notes to Ca, sub notes to C; outlook negative

01 Jul 2020

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.

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 action(s) 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.

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.
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