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21 Jul 2010
Approximately $300 million of debt affected
New York, July 21, 2010 -- Moody's Investors Service placed Concho Resources Inc.'s
(Concho) ratings under review for downgrade following its highly leveraging
acquisition of Marbob Energy Corporation's oil and gas properties
for $1.65 billion. The properties are located within
Concho's largest core area of operations, the West Texas and
eastern New Mexico Permian Basin region.
The properties increase Concho's overall reserve and production
scale, and its diversification within the that Basin, although
it does so at a high cost per flowing barrel of oil-equivalent
(boe) of reserves. Funding includes $300 million in privately
placed common equity, $50 million in common equity issued
to the seller and $1.3 billion in debt. Leverage
is further amplified by the comparatively low proportion of drilled,
developed, cash flowing reserves relative to the price paid,
elevating bondholders' exposure to subsequent associated heavy capital
spending and inherent geologic, drilling and commerciality risk
of the properties.
Nevertheless, Concho was already conservatively positioned within
its ratings to accommodate Concho's stated intention at the time
to remain opportunistically acquisitive although the Marbob acquisition
may exceed the credit parameters anticipated by the ratings. However,
the company has been specific about potential asset sales.
Accordingly, the ratings review will assess the potential for material
near term asset sales and the degree of potential leverage reduction on
daily production and reserves. Secondarily, the review will
also assess the degree to which leverage on reserves and production may
decline in the next four quarters due to cost effective volume growth
from the drill bit.
The acquisition increases Concho's leverage on daily production
by 122% to approximately $40,030/boe of daily production
and its leverage on proven developed (PD) reserves by 112% to $13.20/boe
of PD reserves. While leverage (debt plus all future years FAS
69 capital outlays) on pro-forma proven reserves rises by approximately
40%, this is calculated without the benefit of year-end
SEC reserve data.
Ratings under review include Concho's B1 Corporate Family Rating
(CFR) and Probability of Default Rating (PDR), and the B3 (LGD6-90%)
rating on its $300 million of senior unsecured notes.
The $1.3 billion of debt financing consists of at least
$300 million of new senior unsecured notes issued to the public,
$150 million of new senior unsecured notes issued to the seller,
and up to $850 million borrowed under the company's revolving
credit facility. The equity funding consists of a $300 million
PIPE (Private Placement of Public Equity) issuance and a $50 million
issuance of common equity to the seller.
Partially offsetting the impact of higher leverage is the increased scale
of Concho's operations post-acquisition, its continued
oil weighting (pro-forma production is 65% liquids),
and the sound operational track record the company has demonstrated since
initially receiving its B1 rating in September of 2009. From June
30, 2009 to March 31, 2010 Concho grew production by approximately
19% while maintaining a quarterly trend in falling leverage on
PD reserves. Finding and development costs have been competitive,
although this may rise as Concho funds the drilling and development of
its large proportion of proven undeveloped reserves.
Concho has adequate liquidity to meet its anticipated cash needs over
the next twelve months. Concho will have a $2 billion senior
secured borrowing base credit facility with approximately $500
million of availability. The company will be well within compliance
with the two covenants of its credit facility. Concho has no debt
maturities until July 31, 2013 when its credit facility matures.
The size of the secured debt overhang results in a B3 note rating under
Moody's LGD Methodology.
The last rating action for Concho was September 11, 2009 when Moody's
assigned the current ratings.
Concho's ratings have been assigned by evaluating factors that
Moody's believes are relevant to the company's risk profile, such
as the company's (i) business risk and competitive position compared with
others within the industry; (ii) capital structure and financial
risk; (iii) projected performance over the near to intermediate term;
and (iv) management's track record and tolerance for risk. These
attributes were compared against other issuers both within and outside
Concho's core industry; Concho's ratings are believed
to be comparable to those of other issuers with similar credit risk.
The last rating action was on September 11, 2009 when Concho was
assigned a first time B1 Corporate Family Rating (CFR), a B1 Probability
of Default Rating (PDR), and a B3 (LGD 6, 90%) rating
was assigned to its senior unsecured notes.
Concho Resources Inc. is an independent exploration and production
company headquartered in Midland, Texas.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's places Concho Resources' ratings under review for downgrade
No Related Data.
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