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Global Credit Research - 09 Dec 2010
$650 million of rated debt affected
New York, December 09, 2010 -- Moody's rates Concho Resources' new notes B3
$650 million of rated debt affected
Moody's Investors Service assigned a B3 rating to Concho Resources Inc.'s
(Concho) proposed offering of $350 million Senior Notes due 2021.
The Speculative Grade Liquidity (SGL) rating was raised to SGL-2
from SGL-3 and the rating outlook is negative.
The B3 rating on the new notes reflects Concho's stated intention
to use the net proceeds from the offering to reduce borrowings under its
credit facility, resulting in no change in total debt since the
last rating action on December 6, 2010 when the company's
ratings were confirmed with a negative outlook. It also considers
the positive impact of the approximately $200 million equity issuance
on Concho's continuing progress toward reducing its leverage.
Net proceeds from the offering are being used to reduce borrowings under
the credit facility thereby reducing total debt and leverage on production
and reserves. The change to SGL-2 from SGL-3 recognizes
the increased availability under the credit facility resulting from both
"The issuance of both the new notes and the common equity demonstrates
Concho's continuing progress toward reducing its leverage on production
and reserves while enhancing its liquidity profile" commented Jonathan
Kalmanoff, Moody's Analyst.
Concho has good liquidity through 2011. The company plans to spend
mostly within cash flow (excluding acquisitions) and has a senior secured
credit facility with a borrowing base as of October 2010 of $2
billion and a negligible cash balance. At September 30, 2010
(pro-forma for the October 2010 Marbob acquisition, the December
2010 Permian Basin asset sale, the December 2010 issuance of $350
of senior unsecured notes, and the December 2010 issuance of $200
million of common equity) there was $1 billion of availability
under the facility and Concho had significant headroom under the leverage
ratio and current ratio covenants. There are no debt maturities
until July 31, 2013 when the credit facility matures. Substantially
all of Concho's assets are pledged as security under the credit facility
which limits the extent to which asset sales could provide a source of
additional liquidity if needed.
Concho's ratings are supported by its oil focus, strong operational
track record with low F&D costs, seasoned management team with
extensive experience in the Permian Basin, its history of material
leverage reduction following acquisitions, and our expectation of
continuing leverage reduction through 2011 from highly elevated levels
following the October 2010 Marbob acquisition. The ratings also
consider the company's aggressive growth strategy and geographic
concentration in the Permian Basin.
While leverage has improved, the negative outlook reflects Concho's
still high leverage on production and reserves pending anticipated further
de-leveraging. Debt / Boe of average daily production sustained
below $30,000 and debt/PD sustained below $10.00
and trending downward could result in a stable outlook. Negative
rating action could result if leverage is not reduced from current levels,
or if a materially leveraging acquisition occurs. Over the longer
term, positive rating action could result if Concho were to substantially
increase its geographic diversification through either a major acquisition,
funded with sufficient equity so that leverage is not materially increased,
or significant organic growth in non-core areas. A decrease
in leverage as a result of prolonged capital spending within cash flow,
with Debt/Boe of average daily production sustained below $18,000
and debt/PD sustained below $6.00, could also result
in positive rating action.
The B3 senior unsecured note rating reflects both the overall probability
of default of Concho, to which Moody's assigns a PDR of B1,
and a loss given default of LGD5-85% (changed from LGD6-91%).
The size of the $2 billion senior secured revolver's potential
priority claim relative to the senior unsecured notes results in the notes
being rated two notches beneath the B1 CFR under Moody's Loss Given Default
The last rating action on Concho was on December 6, 2010 when its
Corporate Family Rating (CFR) and senior unsecured note ratings were confirmed
with a negative outlook.
The principal methodology used in rating Concho Resources Inc.
was Moody's Independent Exploration and Production (E&P) Industry
rating methodology published in December 2008. The methodology
is available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Concho Resources Inc. is an independent exploration and production
company headquartered in Midland, Texas.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service information, and
confidential and proprietary Moody's Analytics information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's rates Concho Resources' new notes B3
250 Greenwich Street
New York, NY 10007
No Related Data.
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