Fitch Ratings has affirmed
In addition, Fitch has affirmed BlackBrush's first-lien term loan at 'CCC+'/'RR4'.
BlackBrush's ratings reflect its small scale, reduced operating momentum in 2021, working interest on its core
Key Rating Drivers
Regaining Production Growth in 2022: With a material decline in production in 2021 to below 5Mboepd, Fitch expects BlackBrush to regain this lost production in 2022, and to generate approximately
High, But Manageable Leverage: In
This restructuring extended the company's first maturity to 2025, and initially re-sized the first lien term loan to approximately 1.0x PDP reserves, which has since improved to well under 1.0x. Under Fitch's Hybrids Treatment and Notching Criteria, BlackBrush's preferred equity receives 0% equity credit, which results in Fitch forecast leverage at YE 2021 of 9x.
Refinancing Risk: BlackBrush benefits from a capital structure that does not include financial maintenance covenants, requires less than
Limited Financial Flexibility: BlackBrush does not operate with a revolving credit facility, which in the absence of access to other external funding sources, greatly reduces the company's financial flexibility. Fitch expects BlackBrush to continue to explore other sources of financing (e.g. forward PDP sales, Drill Co agreements, non-core divestitures, etc.) to provide capital to develop its Karnes county
Asset Base Restricts Operational Flexibility: BlackBrush's asset base consists of approximately 255,000 gross acres in the Eagle Ford and
BlackBrush's development program targets their
Unhedged Production: BlackBrush does not have any oil hedges in place after 2021, and its open gas hedges expire in 1Q22. Unhedged volumes in 2022 provide upside to strong oil and gas prices, but no certainty on future cash flows. BlackBrush's current hedge position, particularly given it doesn't have a revolving facility to draw down should a weaker oil and gas environment affect its ability to meet its operating capital needs, adds cash flow risk to its credit profile.
Derivation Summary
BlackBrush's production of approximately 5Mboepd (72% liquids) at 3Q21, is materially lower than
BlackBrush's Fitch calculated unhedged cash netbacks of
BlackBrush's leverage at approximately 9x at fiscal 2021 is materially higher than the peers above; however, leverage is expected to decrease towards approximately 4x in 2022 as production and EBITDA improve, which were affected by sub maintenance capital investments made in 2020 when the company prioritized liquidity preservation.
Key Assumptions
WTI prices of
Majority of capex allocated to
Increasing gross debt resulting from the PIK features of the company's first lien term loan and preferred stock (0% equity credit);
Working capital in 2021 benefits from certain large capex expenses being paid in 2022;
Liquids mix relatively stable through the forecast period.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Material improvement in ability to invest in, and de-risk, more prospective assets that reduces refinancing and liquidity risk;
Average production trending toward 20 Mboepd on a sustained basis;
Total Debt with Equity Credit / Operating EBITDA sustained below 3.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Erosion of liquidity resulting in FFO Interest Coverage below 1.5x;
Continued below-maintenance investment that heightens refinancing and liquidity risk.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Liquidity: BlackBrush does not have access to a revolving credit facility, and utilizes on cash on hand (
Debt Structure: BlackBrush's debt consists of an approximately
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes BlackBrush would be liquidated in hypothetical bankruptcy rather than being reorganized as a going-concern. The liquidation assumption is informed by the low working interest in its core
Going-Concern (GC) Approach
The GC EBITDA estimate reflects Fitch's view of a sustainable, post-reorganization EBITDA level upon which we base the enterprise valuation, which reflects the decline from current pricing levels to stressed levels. Fitch believes that in a weakened commodity price environment, which BlackBrush's lack of 2022 and beyond oil and gas hedges exposes them to, could result in BlackBrush investing at sub maintenance capex levels resulting accelerating production declines after 2022.
An EV multiple of 3.0x EBITDA is applied to the GC EBITDA to calculate a post-reorganization enterprise value. The choice of this multiple considered the following factors:
The historical bankruptcy case study exit multiples for peer companies ranged from 2.8x-7.0x, with an average of 5.2x and a median of 5.4x;
The multiple reflects the BlackBrush's relatively low working interest in their core
Liquidation Approach
The liquidation estimate reflects Fitch's view of the value of balance sheet assets that can be realized in sale or liquidation processes conducted during a bankruptcy or insolvency proceeding and distributed to creditors.
Fitch considers valuations such as SEC PV-10 and M&A transactions for each basin including multiples for production per flowing barrel, proved reserves valuation, value per acre and value per drilling location.
The allocation of value in the liability waterfall results in a recovery rating of 'CCC+'/'RR4' for the senior secured term loan, in line with the company's IDR.
Issuer Profile
BlackBrush is a small (5Mboepd average in 2021, 71% liquids), privately-owned independent oil & gas exploration and production (E&P) company headquartered in
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
(C) 2021 Electronic News Publishing, source