S&P: W&T Offshore Inc. Upgraded To 'CCC' From 'SD' Following Senior Unsecured Note Exchange; Outlook Negative
The issue-level and recovery ratings on the company's remaining debt issues are unchanged.
"We raised the corporate credit rating on W&T Offshore following the exchange of its 8.5% senior unsecured notes due 2019, and our reassessment of the company's capital structure and credit profile," said S&P Global Ratings credit analyst Kevin Kwok. "The rating reflects our expectation that debt leverage will remain at what we consider unsustainable levels over the next 24 months and that the company could face a liquidity shortfall in the next 12 months, due to declining production and cash flows, higher costs, or a potential reduction in the company's borrowing base," he added.
There is also a possibility that Bureau of Ocean Energy Management (BOEM) could require the company to provide additional financial security on certain federal offshore oil and gas leases. The outstanding orders total $260.8 million, but the company expects to obtain amendments that will adjust this amount as it has successfully done through private negotiations in the past.
We raised the issue-level rating on the 8.5% senior unsecured notes due 2019 to 'CC' from 'D', reflecting our opinion that there will be no further distressed exchanges on these notes.
We have revised our assessment of W&T Offshore's liquidity to less than adequate from adequate, reflecting limited covenant headroom, our opinion that the company has limited ability to absorb a high-impact low-probability event without refinancing, its less-than-satisfactory standing in the credit markets, and less-than-prudent risk management. We also believe there could be a reduction in the company's borrowing base during the spring redetermination, or an increase in BOEM-mandated security requirements causing a potential shortfall in 2017.
The negative rating outlook on W&T Offshore reflects the possibility that we could lower the rating if we believed the company would be unable to meet its financial or other obligations.
We could lower the rating if liquidity deteriorated such that we expected a material deficit, or if we no longer expected the company to be able to meet its obligations. This would most likely occur if the company's proved reserves declined, potentially leading to a reduction in the borrowing base at the spring redetermination. We could also lower the rating if the company was unable to continue amending the BOEM orders through private negotiations and was forced to provide $260.8 million in financial securities, or if it announced additional distressed exchanges.
We could revise the outlook to stable if the company were able to improve liquidity, which would most likely occur if it were able to grow reserves to maintain or increase the current borrowing base to fund capital expenditures over the next few years, likely in conjunction with an oil price recovery.
For a more detailed recovery analysis, see the research update published on W&T Offshore published on Sept. 9, 2016, on RatingsDirect.