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Rating Action:

Moody's rates EP Energy's proposed secured notes B1

17 May 2018

New York, May 17, 2018 -- Moody's Investors Service (Moody's) assigned a B1 rating to EP Energy LLC's (EPE) proposed senior secured notes due 2026. The net proceeds from the offering will be used to repay a portion of outstanding borrowings under the RBL credit agreement and for general corporate purposes. EPE's existing ratings, including the Caa1 Corporate Family Rating (CFR), Caa1-PD Probability of Default Rating, B3 rating on the existing 1.25 lien senior secured notes, Caa2 ratings on the 1.5 lien senior secured notes and second lien term loan, and Caa3 ratings on its senior unsecured notes and SGL-3 Speculative Grade Liquidity (SGL) rating were affirmed. The rating outlook is stable.

"The debt issuance will improve EP Energy's liquidity and provide funds for further development of its oil & gas assets", commented James Wilkins, Moody's Vice President.

The following summarizes the ratings activity:

Assignments:

..Issuer: EP Energy LLC

....Gtd Senior Secured Notes, Assigned B1 (LGD2)

Affirmations:

..Issuer: EP Energy LLC

.... Probability of Default Rating, Affirmed Caa1-PD

.... Speculative Grade Liquidity Rating, Affirmed SGL-3

.... Corporate Family Rating, Affirmed Caa1

....Senior Secured Second Lien Term Loan, Affirmed Caa2 (LGD5)

....Gtd Senior Secured Notes, Affirmed B3 (LGD3)

....Senior Secured Notes, Affirmed Caa2 (LGD4)

....Senior Unsecured Notes, Affirmed Caa3 (LGD6)

Outlook Actions:

..Issuer: EP Energy LLC

....Outlook, Remains Stable

RATINGS RATIONALE

The proposed senior secured notes due 2026 are rated B1 (three notches above the Caa1 CFR) consistent with Moody's loss-given-default rating methodology, reflecting the secured notes' junior priority claim relative to debt obligations under the $629 million RBL credit agreement and senior priority claim relative to other secured and unsecured debt obligations in EP Energy's capital structure. The affirmation of the ratings on the existing debt reflects the reduction in the RBL credit agreement commitments and issuance of $1 billion of new secured debt. However, the existing debt ratings could be impacted if the size of the amended revolver and new secured notes change.

EPE's Caa1 CFR reflects the company's high leverage as well as Moody's expectation that the company will outspend its funds from operations as it develops its acreage and increases production volumes. The company expects to spend $600 million - $650 million in 2018, of which about one-half will be spend in the Eagle Ford. Despite reducing debt by around $1 billion in 2016 and a focus on limiting negative free cash flow generation, the company still has elevated leverage ($4.2 billion of balance sheet debt as of March 31, 2018; retained cash flow to debt was below 10% in the first quarter 2018). Moody's estimates that EPE's asset coverage (PV-10 value relative to debt) is less than 1.0x, which is indicative of high leverage. In addition, EPE faces a heavy cash interest expense (more than $300 million per year), which adds approximately $11 per boe to its cost structure. The company's consistent hedging practices somewhat buffers its cash flows from the full effects of low and volatile commodity prices. EPE's had hedges covering 85% of estimated 2018 production volumes, as of the end of the first quarter.

The SGL-3 Speculative Grade Liquidity Rating reflects Moody's expectation EPE will maintain adequate liquidity through mid-2019. Its liquidity is supported by minimal cash balances ($19 million of unrestricted cash as of March 31, 2018), $565 million of availability under its $1.36 billion first lien revolving credit facility due May 24, 2019 (net of $775 million of borrowings and approximately $19 million of letters of credit) and EPE's cash flow from operations. Following the completion of the notes offering, EPE plans to repay existing borrowings and amend the RBL facility terms. The new facility will have $629 million of commitments ($1.36 billion borrowing base following the April 2018 re-determination), mature November 23, 2021, and will be undrawn. Under Moody's price estimates the company will generate negative free cash flow in 2018 under an increased capital spending program, but we expect the revolver will have more than sufficient borrowing capacity to fund the outspend of cash flow from operations. The amended RBL facility will have two financial covenants: (1) a maximum first lien net debt to EBITDAX ratio of 2.25x and (2) minimum current ratio of 1.0x, which Moody's expects EPE will be able to comply with through mid-2019. EPE's alternative sources of liquidity are limited, as a significant portion of its assets are pledged as collateral to its secured debt; however, the company has begun to use joint venture drilling arrangements to ease its heavy capital requirements. Through May 2019, $30 million of term loan debt matures. Following the RBL credit agreement amendment, the next large debt maturity is in May 2020 when $246 million of senior unsecured notes mature.

The rating outlook is stable, reflecting Moody's expectation that EPE will grow its production volumes and improve its cash flow metrics. An upgrade could be considered if the company reduces its debt and maintains retained cash flow to debt above 15% while growing production or keeping production relatively flat. The ratings could be downgraded if liquidity deteriorates or retained cash flow to debt is expected to remain below 5% for a sustained period.

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.

EP Energy LLC, headquartered Houston, Texas, is an independent exploration & production company with operations in the Permian, Eagle Ford and Altamont basins.

REGULATORY DISCLOSURES

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 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.

James Wilkins
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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