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31 May 2016
New York, May 31, 2016 -- Moody's Investors Service, ("Moody's") downgraded
the Corporate Family Rating (CFR) of Gastar Exploration Inc (Gastar) to
Caa3 from Caa1, the rating on its senior secured notes due 2018
to Caa3 from Caa2, and the speculative grade liquidity (SGL) to
SGL-4 from SGL-3. The rating outlook was changed
to negative from stable.
"Gastar's reduced scale amid the volatile commodity price
environment will result in weakened cash flow metrics and tightened liquidity
in 2016 and 2017," said Arvinder Saluja, Moody's
Issuer: Gastar Exploration Inc.
Probability of Default Rating, Downgraded to Caa3-PD
Corporate Family Rating, Downgraded to Caa3 from Caa1
$325 mm Senior Secured Notes, Downgraded to Caa3
(LGD4) from Caa2 (LGD5)
Speculative Grade Rating, Downgraded to SGL-4 from
Outlook changed to negative
The downgrade of Gastar's CFR to Caa3 reflects the company's
weakened liquidity and reduced size following the sale of its Appalachian
assets in April 2016. While the company maintains a favorable hedging
profile for 2016 and has shifted its production profile towards higher-margin
liquids following the asset sale, reduced production volumes will
negatively impact credit metrics. Gastar will require a relatively
high level of capex to maintain and potentially grow production in its
largely undeveloped STACK play acreage. Additionally, any
proceeds from future asset sales will be used to reduce outstanding amounts
on the revolver, impeding cash investments for growth in production
or asset diversification.
The company is expected to have weak liquidity, as reflected by
the speculative grade liquidity rating of SGL-4, to cover
its cash needs through at least mid-2017. The covenant compliance
cushion is expected to decline in 2016 as well, and may require
additional waivers or amendments. In March 2016, the company
amended its covenants to provide relief after breaching the leverage ratio
and senior secured leverage ratio covenants at year-end 2015.
The company was able to obtain a permanent waiver of the defaults at December
31, 2015. As a result of the amendment, the company
must maintain maximum leverage ratio of not greater than 4.0x for
each fiscal quarter (starting quarter ending June 30, 2017),
an interest coverage ratio of 1.10x (between quarter ending June
30, 2016 and June 30, 2017), with a step up to 2.5x
starting quarter ending June 30, 2017. The company's
senior secured leverage ratio must be lower than 2.5x (starting
quarter ending June 30, 2016 until June 30, 2017), with
a step-down to 2.0x in June 30, 2017.
The company's borrowing base was $180 million as of March
31, 2016. Following its Appalachian asset sale on April 8,
2016, the company repaid $80 million of the fully drawn revolver,
and the borrowing base was lowered to the new balance of $100 million.
In addition, as part of the amendment to the credit facility,
any asset sales over $5 million or termination of any hedge agreements
governing hedges with a settlement date on or after August 1, 2016
will be applied towards the revolver and an automatic further reduction
of the borrowing base.
Gastar's Caa3 CFR reflects its weak liquidity, reduced and
relatively modest scale, geographic concentration, its limited
track record in the Mid-Continent region, and weak cash flow
coverage metrics. Gastar sold off its Appalachian Basin producing
assets and proved reserves (as well as portion of undeveloped acreage)
in the second quarter of 2016. Even though pro forma for the Appalachian
asset sales, Gastar's production mix will be skewed towards
liquids (70% with 50% oil and 20% NGLs) and less
towards gas (30%), weaker prices have impacted all three
streams. The tough and volatile commodity price environment will
cause it to have limited ability to sustain meaningful capex and drilling
activity on its remaining acreage. The rating incorporates the
benefits of Gastar's acreage position in the STACK play in the Mid-Continent
which is proving to be promising based on initial results from offset
operators, available inventory of drilling opportunities to facilitate
future growth when cash flow permits, and a good 2016 hedging profile.
The $325 million of senior secured notes due 2018 are Caa3,
at the same level as the Caa3 CFR. Under Moody's Loss Given Default
Methodology, the suggested ratings would be Ca because of the amount
of higher priority debt in the form of the senior secured revolving credit
facility with a $100 million borrowing base. Moody's
viewed the Caa3 rating as more appropriate given our expectation of potential
recovery for the senior secured notes owing to Gastar's meaningful
acreage position in the STACK play. The secured notes are guaranteed
by essentially all material domestic subsidiaries on a senior secured
second-lien basis and are subordinated to the senior secured credit
facility's priority claim to the company's assets.
The negative outlook reflects the liquidity stress on the company in this
difficult price environment. The ratings could be downgraded if
there is further deterioration in liquidity or if the company misses an
interest payment. An upgrade is possible if interest coverage improves
above 1.1x while the company maintains adequate liquidity.
The principal methodology used in these ratings was Global Independent
Exploration and Production Industry published in December 2011.
Please see the Ratings Methodologies page on www.moodys.com
for a copy of this methodology.
Gastar Exploration Inc. (Gastar), previously known as Gastar
Exploration USA, Inc., is an independent oil and gas
exploration and production (E&P) company, headquartered in Houston,
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
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
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Arvinder Saluja, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
MD - Corporate Finance
Corporate Finance Group
Moody's downgrades Gastar Exploration Inc's CFR to Caa3
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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