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Rating Action:

Moody's downgrades Extraction Oil and Gas' CFR to Caa2; negative outlook

07 Apr 2020

New York, April 07, 2020 -- Moody's Investors Service, ("Moody's") downgraded Extraction Oil and Gas, Inc.'s (Extraction) Corporate Family Rating (CFR) to Caa2 from B2 and Probability of Default Rating (PDR) to Caa2-PD from B2-PD. The ratings on the unsecured notes were downgraded to Caa3 from B3. The Speculative Grade Liquidity Rating was downgraded to SGL-4 from SGL-3. The outlook has been revised to negative from stable.

The rating action reflects Moody's concern about Extraction's ability to redeem its $190 million preferred stock issue in 2021 at a time when exploration and production companies have limited capital market access. Refinancing risk is exacerbated by the likelihood of a significant borrowing base reduction in the upcoming redetermination due to a severe drop in commodity prices and Moody's expectation that Extraction will face production declines given its substantially reduced 2020 capital budget. The downgrade also encompasses Moody's' concern that the distressed trading levels of Extraction's unsecured may motivate it to repurchase its notes at deeply discounted prices in a volume Moody's would deem a distressed exchange.

Downgrades:

..Issuer: Extraction Oil and Gas, Inc.

.... Probability of Default Rating, Downgraded to Caa2-PD from B2-PD

.... Speculative Grade Liquidity Rating, Downgraded to SGL-4 from SGL-3

.... Corporate Family Rating, Downgraded to Caa2 from B2

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa3 (LGD5) from B3 (LGD4)

Outlook Actions:

..Issuer: Extraction Oil and Gas, Inc.

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

Extraction's Caa2 CFR reflects heightened restructuring risk given the distressed levels at which its debt trades and weak commodity prices expected to persist into 2021, as well as the prospect for a significant erosion in liquidity due to a likely borrowing base contraction and the October 2021 redemption date of its $190 million preferred stock issue. Extraction's decision to cut its 2020 capital budget by about 40% from its initial guidance (and about 60% from 2019 levels) will likely lead to a meaningful drop in production, given the company's steep initial decline rates of its shale assets. The rating is further constrained by the company's single basin focus and ongoing regulatory uncertainty in Colorado. Extraction benefits from its large inventory of drilling locations with favorable economics, ownership Elevation Midstream, LLC (Elevation) and a strong hedge position that provides meaningful cash flow protection in 2020 and, to a lesser extent, in 2021.

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 Extraction's credit profile have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and Extraction 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 Extraction of the breadth and severity of the oil demand and supply shocks, and the broad deterioration in credit quality it has triggered.

Extraction's SGL-4 rating is based on our expectation that the company will have weak liquidity through early 2021. Extraction had $32 million of cash on its balance sheet and $480 million available under its revolving credit facility at December 31, 2019. However, Moody's expects the company's $950 million borrowing base to be substantially reduced in the upcoming May redetermination due to very weak commodity prices and the likelihood production will fall noticeably due to a capital budget that is expected to be about 60% lower than 2019 levels. Extraction's $190 million preferred stock issue has an October 2021 redemption date. The maturity date of the company's revolver accelerates from August 2022 to April 15, 2021 if the preferred remains outstanding as of that date.

Cash flow is buttressed by the company's commodity hedging program, with more than 80% of expected oil production for the remainder of 2020 locked in at or above $55/bbl; however, Extraction's 's hedge position weakens in 2021. Elevation, the company's unrestricted midstream subsidiary, has considerable value and could be partially or fully monetized as a source of liquidity. Still, in the event Extraction is able to redeem or extend the maturity of its preferred stock, the company will be challenged to extend its revolver in 2022 given the large balance likely to be drawn and looming notes maturities in 2024 and 2026. The revolver has two financial covenants -- a maximum leverage (net debt to EBITDAX) of 4.0x and a minimum current ratio of 1.0x. Moody's forecasts Extraction will have difficulty maintaining compliance with its leverage covenant in early 2021.

Extraction's debt is comprised of $400 million of senior unsecured notes due 2024, $700 million of senior unsecured notes due 2026 and the secured revolving credit facility due August 2022. The unsecured notes, which are contractually subordinated to the secured revolver debt, are rated Caa3, one notch below the Caa2 CFR. The notes and revolver are guaranteed by Extraction's existing and future subsidiaries.

The negative outlook reflects Moody's expectation that Extraction's liquidity will weaken considerably over the next twelve months when the company will be challenged to address its preferred stock redemption.

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

Ratings could be downgraded if the company is unable to address the preferred stock redemption prior to the maturity of the revolver accelerating or if RCF/debt falls below 10%. An upgrade is unlikely in the near term and dependent on the company satisfactorily addressing the 2021 maturity and improving its liquidity.

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.

Extraction Oil and Gas, Inc., headquartered in Denver, Colorado, is a public oil and gas exploration and production (E&P) company with approximately 159,000 net acres in its focus area of the Denver-Julesburg (DJ) Basin and a total of approximately 289,000 net acres.

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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