S&P: Great Western Petroleum LLC Rated 'B-'; Outlook Stable; Senior Unsecured Notes Rated 'CCC+' (Recovery Rating: '5')
At the same time, we assigned our 'CCC+' issue-level rating and '5' recovery rating to the company's proposed $300 million senior unsecured notes. The '5' recovery rating indicates our expectation for modest (10% to 30%; lower half of the range) recovery of principal in the event of a payment default. Great Western Finance Corp. is the coborrower of the debt.
We expect the company to use the proceeds from the proposed unsecured notes to refinance its existing credit facility and second-lien notes, and for other general corporate purposes.
"The ratings on Great Western reflect our assessment of the company's vulnerable business risk, aggressive financial risk profile, and adequate liquidity," said S&P Global Ratings' credit analyst Aaron McLean. This reflects the company's small reserve base and production, large proportion of proved undeveloped (PUD) reserves, and limited geographic diversification. Great Western will be one of the smallest companies with respect to both reserves and daily production that we rate. Partly offsetting these factors are the company's low costs and high proportion of liquids.
The stable outlook reflects our expectation that despite the current lower price environment, Great Western will continue to expand production as it develops its reserves in the DJ basin while maintaining adequate liquidity. We expect that the company will maintain credit measures that we consider appropriate for the current rating, including FFO/debt of about 30% through 2017.
We could lower the rating over the next 12 months if FFO/debt falls to what we would view as unstainable leverage or liquidity becomes less than adequate. Such a scenario would likely occur if the company fails to expand production as currently forecasted while significantly outspending cash flows.
Given the limited scale and geographic concentration of the company's reserves and production, we view an upgrade over the next year as unlikely. However, we could raise the rating if the company expands its production and reserve base in line with higher-rated peers while maintaining a sustainable capital structure and adequate liquidity.