S&P: Baytex Energy Corp. Ratings Lowered To 'BB-' From 'BB' On Financial Risk Profile Deterioration; Outlook Negative
The downgrade reflects S&P Global Ratings' expectation that Baytex's cash flow metrics and overall financial risk profile remain vulnerable to continued deterioration. Despite the company's ability to curtail costs and spending during the current downturn, and maintain stable debt levels, our projected annual and three-year weighted-average funds from operations (FFO)-to-debt ratios are very weak for the aggressive financial risk profile.
"Although we acknowledge Baytex's operating and financial flexibility to rapidly reduce capital spending and operating costs, persistently low crude oil and natural gas prices have weakened the company's financial risk profile," said S&P Global Ratings credit analyst Michelle Dathorne. There is some risk of continued financial profile deterioration if Baytex's performance deviates from our base-case scenario; however, we believe the company should be able to generate sufficient FFO to fund its maintenance capital spending through 2017.
The ratings reflect our view of Baytex's weakened financial risk profile, and negative-to-negligible free operating cash flow (FOCF) generation throughout our 2016-2018 base-case forecast period. We believe Baytex's existing competitive position, which benefits from its operations in both Canada and the U. S., and the company's stable profitability profile ranking within its exploration and production (E&P) North American peers offset these weaknesses.
The negative outlook reflects S&P Global Ratings expectations that Baytex's cash flow metrics and overall financial risk profile remain vulnerable to continued deterioration. Despite the company's ability to curtail costs and spending during the current downturn, and maintain stable debt levels, our projected annual and three-year, weighted-average FFO-to-debt ratios are very weak for the aggressive financial risk profile. Baytex's cash flow and leverage ratios have deteriorated dramatically in 2015 and 2016, as cash flow generation fell in tandem with hydrocarbon prices. At our current hydrocarbon price assumptions, we expect the company's annual and three-year, weighted-average FFO-to-debt ratios should remain at about 13%. At these levels, the company's cash flow and leverage profile appears inconsistent with its long-standing policy of maintaining a moderately leveraged balance sheet, so we believe the company will actively work to strengthen its balance sheet during our current rating outlook period.
Further deterioration in Baytex's cash flow metrics would weaken its overall credit profile, even if its business risk profile doesn't change. As a result, we could lower the rating if the company's weighted-average FFO-to-debt fell below 12%, and we expected it to remain below this threshold consistently.
We would revise the outlook to stable if the company was able to strengthen its three-year, weighted-average FFO/debt ratio. The FFO/debt ratio range for the aggressive financial risk profile is 12%-20%; we would expect this ratio to strengthen and remain at the upper end of this range to support the 'BB-' credit rating. At our current price assumptions, we believe Baytex would be challenged to generate sufficient cash flow to strengthen its leverage metrics into this range. In the absence of stronger hydrocarbon prices, we believe the company would have to take active steps to reduce debt and bolster its capital structure.