S&P: Halcon Resources Corp. Upgraded To 'B-' From ‘D’ On Bankruptcy Emergence; Outlook Stable
We also raised the issue-level rating on the company's second-lien notes to 'B-' from 'CCC+'. The recovery rating on the notes is '3', reflecting our expectation of meaningful (50%-70%, upper half of the range) recovery in the event of a conventional default.
"The upgrade follows Halcon's emergence from bankruptcy and its comprehensive financial restructuring," said S&P Global Ratings credit analyst Ben Tsocanos. "The company reduced debt by approximately $1.8 billion as a result and we forecast that its financial leverage will remain at sustainable levels," he added.
We view Halcon's operating costs as relatively high, however, and expect that many of its properties require oil prices higher than current levels in order to be developed economically.
Our ratings on Halcon incorporate assessments of business risk as vulnerable and financial risk as aggressive, and liquidity as adequate.
The stable outlook reflects our view that Halcon's leverage has stabilized after eliminating a major portion of its debt, post-bankruptcy. We estimate that the company's leverage will weaken significantly in 2017 after hedges roll off and remain above 4x debt to EBITDA and below 20% FFO to debt. We expect leverage to begin to improve in 2018, reflecting our higher oil price assumptions.
We would consider a downgrade if over the next 12 months the company's leverage falls to levels we would consider unsustainable or liquidity becomes less than adequate. Such a scenario would likely occur if Halcon significantly outspends internally generated cash flow or if commodity prices decline significantly.
We could raise the rating should the company successfully decrease operating costs and materially increases production and proved reserves while not materially increasing current leverage levels.