New York, January 07, 2021 -- Moody's Investors Service ("Moody's") assigned
a Ba3 rating to Hilcorp Energy I, L.P. (HEI) and co-issuer
Hilcorp Finance Company's proposed offering of $1.0 billion
senior unsecured notes. The Ba2 Corporate Family Rating (CFR),
the Ba2-PD Probability of Default Rating (PDR) and stable outlook
are not affected by this action.
Proceeds of the proposed offering will be used to fund the partial redemption
of HEI's 2024 and 2025 unsecured notes, and to repay borrowings
outstanding under the company's revolving credit facility.
"HEI's notes issue is an exercise in liability management
that will extend the average life of its debt maturities and increase
the availability liquidity under its revolving credit facility,"
commented Andrew Brooks, Moody's Vice President, "while
having no negative or positive implications on its ratings."
Assignments:
..Issuer: Hilcorp Energy I, L.P.
....Senior Unsecured Notes, Assigned
Ba3 (LGD5)
RATINGS RATIONALE
The Ba3 rating on HEI's senior unsecured notes reflects their subordinate
position to the company's $1.6 billion secured borrowing
base revolving credit's priority claim to the company's assets.
The size of the senior secured claims relative to HEI's outstanding senior
unsecured notes results in the notes being rated one notch below the Ba2
CFR.
Effective June 30, 2020, HEI closed on its $5.5
billion acquisition of BP p.l.c.'s (BP) entire
Alaskan upstream and midstream asset base, including BP Exploration
(Alaska) Inc., that owns all of BP's upstream oil and gas
interests in Alaska. The acquisition gave HEI a 26.4%
interest in the prolific Prudhoe Bay field, which it now operates.
The 50% of the Milne Point producing asset not presently owned
by HEI was contributed to HEI at closing, while the remainder of
the upstream asset package is held in a separately capitalized,
100% owned unrestricted HEI subsidiary, Hilcorp North Slope,
LLC (HNS). The acquisition of BP Alaska's associated midstream
assets closed in a separate transaction at Harvest Midstream I,
L.P. (Ba3 stable) on December 18, 2020.
HEI capitalized the independently evaluated fair market valuation of HNS
on its balance sheet in accordance with GAAP, whose debt Moody's
includes in HEI's consolidated debt aggregate. As such, the
$4.5 billion total amount of HEI's consolidated debt
at September 30 has increased by approximately two-thirds from
its $2.65 billion pre-acquisition total. At
September 30, HEI's 12-month debt on production approximated
$22,700 per barrel of oil equivalent (Boe), although
based on 2020's third quarter run rate, debt remained at slightly
over $18,000 per Boe of production. Retained cash
flow (RCF) to debt is likely to remain in the mid-20% area.
The acquisition of BP's assets increased HEI's Alaskan equity production
to around 112,000 Boe per day in 2020's third quarter,
with total third quarter production across HEI's portfolio increasing
to 205,000 Boe per day (excluding 48,000 Boe per day of third
party sales). Consolidated proved reserves at June 30 aggregated
1,175 million Boe (55% oil, 73% proved developed),
29% attributed to HNS, and whose $10.3 billion
PV-10 covered consolidated debt by over 2x. HEI has consistently
employed a strategy of acquiring mature, long-lived properties
with a base level of production, including Alaska's Cook Inlet and
North Slope regions, creating value by minimizing declining well
performance and reducing costs. Moody's expects HEI to extend this
strategy to the newly acquired Alaskan assets as well.
Mr. Jeffery Hildebrand owns the vast majority of HEI's limited
partner interests and holds the 1% general partnership interest
through Hilcorp Energy Company, which manages HEI's oil and gas
operations. The singular control Mr. Hildebrand wields over
the Hilcorp enterprise is also considered in HEI's credit profile.
However, HEI has prospered under Mr. Hildebrand's control
and leadership, while limiting its use of excessive debt financing.
Moody's expects HEI's liquidity position to remain good into 2021.
At September 30, HEI's balance sheet cash totaled $339.5
million, bolstered by $445 million of nine-month positive
free cash flow. HEI's $1.6 billion secured borrowing
base revolving credit facility was utilized in the amount of $955
million at September 30, and is scheduled to mature in November
2022. HNS has no credit facilities, and its debt is not guaranteed
by HEI. Moody's expects HEI and HNS to be substantially free cash
flow positive, using cash flow for the repayment of their respective
debt obligations.
The stable outlook reflects HEI's low risk exploitation strategy,
and Moody's expectation that the company will be able to generate free
cash flow for debt reduction.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A rating upgrade could be considered if HEI reduces consolidated debt
to average daily production below $18,000 per Boe and increases
RCF to debt above 30%. Moody's would further expect that
HEI's future growth strategy not materially deviate from its historic
focus on the acquisition of mature, longer-lived assets whose
potential avail themselves to future exploitation upside. A downgrade
is possible should HEI's debt increase above $25,000 per
Boe of average daily production, should RCF to debt drop below 20%
or should debt levels further increase to fund acquisitions or distributions.
Hilcorp Energy I, L.P. is a private limited partnership
headquartered in Houston, Texas. The company's primary producing
assets are located in Alaska, Texas, Louisiana and the Utica
Shale.
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.
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
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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
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For any affected securities or rated entities receiving direct credit
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review.
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and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
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
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The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
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Andrew Brooks
VP - Senior Credit Officer
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
