S&P: Range Resources Corp. Outlook Revised To Stable From Negative On Memorial Resource Development Acquisition
The senior unsecured and subordinated issue-level ratings remain 'BB+'. The recovery rating remains '3', indicating meaningful (50%-70%; higher end of the range) recovery in the event of a default.
Range Resources Corp. completed its acquisition of Memorial Resource Development Corp. (MRD) for about $3.1 billion in stock and the assumption of $1.1 billion of debt. The use of equity to fund a large portion of the acquisition will reduce Range's financial leverage. The transaction also modestly increases Range's scale and geographic diversity, though reinforces the company's concentration in natural gas. We expect Range's exposure to natural gas prices to continue to be a comparative disadvantage relative to oil under our price assumptions. We view Range's expertise in developing gas properties in the Marcellus formation to be transferable to MRD's Terryville acreage in northern Louisiana. MRD's production also benefits from proximity to Gulf Coast markets and is not subject to infrastructure constraints that have resulted in wide negative price differentials or high transportation costs for Marcellus output.
"The stable outlook reflects our expectation that Range's credit measures will be slightly weak for the rating in 2017 and improve in 2018, with projected FFO to debt expected to be near 20% and debt to EBITDA declining to under 4x as commodity prices improve," said S&P Global Ratings credit analyst Ben Tsocanos.
We could lower the rating if company's credit measures weaken such that FFO to debt remains near 12% and debt to EBITDA remains near 5x on a sustained basis. This could occur if natural gas prices remained depressed, if Range significantly outspends cash flow, or operating costs escalated substantially.
We consider an upgrade over the next year as unlikely under our commodity price assumptions. We could consider a positive rating action if Range's leverage measures improve such that FFO to total debt exceeded 45% and debt to EBITDA declined closer to 2x on a sustained basis. This would most likely occur if the company began generating positive free operating cash flow due to improved profitability or greater capital efficiency or realized higher natural gas prices than we currently assume.