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Rating Action:

Moody's downgrades QEP's senior unsecured notes to B3 following credit agreement amendment; B2 CFR affirmed

08 Jun 2020

NOTE: On June 10, 2020, the press release was corrected as follows : In the Regulatory Disclosures section, the first paragraph was added. Revised release follows.

New York, June 08, 2020 -- Moody's Investors Service, ("Moody's") downgraded QEP's Resources Inc.'s (QEP) senior unsecured notes rating to B3 from B2. The downgrade follows the amendment of its revolving credit facility. At the same time, Moody's affirmed QEP's B2 corporate family rating (CFR) and its B2-PD probability of default rating (PDR). The Speculative Grade Liquidity (SGL) rating remains SGL-3. The rating outlook remains negative.

"The changes provided for in the credit agreement amendment necessitate subsidiary guarantees for QEP's revolver, but not for its existing senior notes, creating structural subordination for the latter," said Arvinder Saluja, Moody's Vice President. "However, the amendment also increases the company's financial flexibility through making the revolver availability more certain during this period of weak commodity prices by introducing more lenient financial covenants."

Downgrades:

..Issuer: QEP Resources, Inc.

....Senior Unsecured Notes, Downgraded to B3 (LGD4) from B2 (LGD4)

Affirmations:

..Issuer: QEP Resources, Inc.

....Probability of Default Rating, Affirmed B2-PD

....Corporate Family Rating, Affirmed B2

Outlook Actions:

..Issuer: QEP Resources, Inc.

....Outlook, Remains Negative

RATINGS RATIONALE

QEP's senior notes and revolving credit facility are all issued at the parent level and are unsecured. However, the amended revolver now has subsidiary guarantees, causing the senior notes to be downgraded to B3, or one notch lower than QEP's B2 CFR, due to their structural subordination to the revolver.

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 refinance its near term debt maturities amidst less favorable 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 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 March 31, 2020, the company had $70 million in cash on the balance sheet and no borrowings under its amended unsecured revolving credit facility, which matures in September 2022. Although the commitments under the facility were reduced to $850 million from $1.25 billion, QEP's ability to access the credit facility was limited due to the likelihood of lowered compliance headroom under its previous covenants, mainly the present value (PV-9) to Net Debt (at least 1.50x requirement) covenant. Under the new covenant requirements, QEP's ability to access the credit facility is enhanced. The amended financial covenants require minimum liquidity of $100 million at all times, Net Priority Guaranteed Leverage Ratio of less than 2.50x, and PV-9 to Net Priority Guaranteed Leverage Ratio of greater than 1.50x. Moody's expects QEP to maintain strong headroom under the amended covenants at least through 2021. Moody's expects the company to have breakeven free cash flow from operations in 2020, while needing to draw on the revolver only for small amounts. The company's next maturities are in March 2021 with $332 million of senior notes coming due and in October 2022 with $465 million of senior notes coming due. With the revised credit facility, QEP has the ability to repurchase up to $500 million of senior outstanding notes using its revolver, subject to certain leverage and PV-9 coverage requirements. QEP has some alternative liquidity since the credit facility is unsecured, but the allowed asset sales to raise cash will be more limited under the amended credit facility than in the past.

The negative outlook reflects the increased likelihood that low energy prices and tight capital market conditions could prevail for an extended period of time.

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

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.

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.

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

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.

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.

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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