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Rating Action:

Moody's downgrades QEP Resources to B2; outlook negative

20 Mar 2020

New York, March 20, 2020 -- Moody's Investors Service (Moody's) downgraded QEP Resources, Inc.'s (QEP) Corporate Family Rating (CFR) to B2 from Ba3, Probability of Default Rating to B2-PD from Ba3-PD, and senior unsecured notes ratings to B2 from Ba3. The Speculative Grade Liquidity (SGL) rating was also downgraded to SGL-3 from SGL-2. The rating outlook remains negative.

"While QEP is well hedged for 2020, the sharp decline in global oil and natural gas prices and heightened refinancing risk on its near-term maturities offsets the benefits from its two-basin presence and good 2020 credit metrics," said Arvinder Saluja, Moody's Vice President.

Downgrades:

..Issuer: QEP Resources, Inc.

.... Probability of Default Rating, Downgraded to B2-PD from Ba3-PD

.... Speculative Grade Liquidity Rating, Downgraded to SGL-3 from SGL-2

.... Corporate Family Rating , Downgraded to B2 from Ba3

....Senior Unsecured Notes, Downgraded to B2 (LGD4) from Ba3 (LGD4)

Outlook Actions:

..Issuer: QEP Resources, Inc.

....Outlook, Remains Negative

RATINGS RATIONALE

The rating actions reflect the deterioration in global oil & gas commodity prices and the large amount of debt maturities that North American hydrocarbon producers, including QEP, have over the next several years. The weak commodity price backdrop makes more urgent the company's need to proactively address significant maturities coming due in 2021-2023.

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 decline in oil & gas commodity prices resulting from both the broad decline in demand for refined products (including gasoline, diesel, and jet fuel) as well as the lack of an agreed on production policy by OPEC+ announced in early March that is resulting in an increase in production. More specifically, QEP's credit profile is vulnerable to shifts in market sentiment in these unprecedented operating conditions and QEP 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 QEP of the breadth and severity of the shock, and the uncertainty over when oil & gas prices might recover.

QEP's B2 CFR is challenged by its high capital intensity, execution risk as it continues to develop its Permian acreage and grow production while countering decline in Williston Basin production, and lowered ability to favorably refinance its near term debt amidst anemic capital markets. The rating also reflects the company's high financial leverage as measured against reserves and production. The CFR is supported by its combined production and reserve base in the Permian and Williston basins, which provide basin diversification and oil-focused economics, and its lower exposure to natural gas production after the divestiture of Uinta and Haynesville assets. The ratings also benefit from good 2020 retained cash flow to debt and interest coverage metrics, which are supported by the company's supportive hedge portfolio. However, these metrics will deteriorate in 2021 as hedges roll off and if the commodity prices do not significantly improve.

QEP's SGL-3 rating reflects Moody's expectation that the company will maintain adequate liquidity into 2021. As of December 31, 2019, the company had $166 million in cash on the balance sheet and no borrowings under its $1.25 billion unsecured revolving credit facility, which matures in September 2022. Moody's expects the company to have breakeven free cash flow in 2020, while maintaining full revolver availability and over $100 million cash during the year. The company's next maturities are in March 2021 with $382 million of senior notes coming due and in October 2022 with $500 million of senior notes coming due. QEP has the ability to repay the March 2021 notes using revolver availability, if it so chooses. Moody's expects QEP to maintain adequate headroom under its Net Debt/Capitalization (requirement of less than 60%) and Net Debt/EBITDAX (less than 3.75x) financial covenants, at least through mid-2021. However, compliance under its present value (PV-9) to net funded debt ratio (at least 1.5x) could become less certain in 2021 if commodity prices remain weak. QEP has good alternative liquidity since the credit facility is unsecured, the company can sell properties to raise cash (up to 15% of net book value without lender approval), although current conditions make asset sales difficult.

The QEP senior notes and revolving credit facility are all issued at the parent level, are unsecured and have no subsidiary guarantees. The senior notes are rated the same as QEP's B2 CFR since all of QEP's debts are pari passu in its capital structure.

The negative outlook reflects the increased likelihood that low energy prices and tight capital market conditions could prevail for an extended period of time. QEP's ratings will likely be downgraded if the company is unable to substantially reduce its refinancing risks in a timely manner, if retained cash flow to debt falls below 15%, if the leveraged full-cycle ratio drops below 1x, or if the company undertakes any actions that are deemed by Moody's to be a distressed exchange of debt. The change of outlook to stable and/or a positive rating action would be contingent upon QEP's ability to substantially mitigate refinancing risk, maintaining the leveraged full-cycle ratio above 1.5x and reduce debt leading to a sustainable RCF/Debt over 25%. A more supportive oil and gas price environment will also be needed for considering an upgrade.

QEP Resources, Inc. (QEP) is a publicly traded independent crude oil and natural gas exploration and production (E&P) company focused in two regions, North Dakota and Texas.

The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Arvinder Saluja, CFA
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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