Breaking News
Ad-Free Version. Subscribe now to follow markets, faster and distraction-free. More details

Fitch Rates MEG Energy's Proposed Senior Unsecured Notes 'B+'/'RR3'

CommoditiesJan 19, 2021 10:00
Saved. See Saved Items.
This article has already been saved in your Saved Items

(The following statement was released by the rating agency) Fitch Ratings-New York-19 January 2021: Fitch Ratings has assigned a 'B+'/'RR3' rating to MEG Energy's (MEG) eight-year senior unsecured notes. Proceeds, along with cash on hand, are intended to refinance the company's senior unsecured notes due 2024. MEG's Issuer Default Rating is 'B' and the Rating Outlook is Stable. Fitch views the refinancing as a positive given the extension of the bond maturity and a slight reduction in interest costs. MEG has strengthened its liquidity profile over the past two years, and its liquidity is further enhanced by the expectation of generating positive FCF at current Strip prices. MEG's ratings reflect improving credit metrics, below average refinancing risk, no major bond maturities until 2025 pro forma for the acquisition, adequate liquidity, the expectation that the company will generate positive FCF over the forecasted period, improved transportation logistics that should lead to higher realized prices, and an improving cost structure. This is offset by significant exposure to potentially wide and volatile West Texas Intermediate (WTI) and Western Canadian Select (WCS) spreads, lack of diversification, and exposure to a challenging regulatory environment managed by the Alberta and federal government. The Stable Outlook reflects MEG's conservative financial profile, ability to access debt capital markets and its solid liquidity profile, which should able the company to whether a period of lower commodity prices or widening differentials. Fitch would consider a positive rating action if MEG generates FCF in excess of expectations and the proceeds are applied to reduce debt. Key Rating Drivers Focus on Debt Reduction: MEG reduced leverage from 8.8x in 2018 to 3.3x in 2019 through a combination of increased production, improved differentials, and a wind down of its capital spend program. Although debt/EBITDA increased in 2020 due to the impact of the pandemic, MEG was able to reduce overall debt by CAD132 million and extending maturities, while keeping its revolver undrawn. Fitch believes FCF will be predominately used to reduce debt and fund growth initiatives. Improvements in debt reduction will be a function of the fluctuating WCS discounts and transportation issues. FCF Improvement: Historically, MEG has generated large FCF deficits to fund its growth objectives while also being subjected to modest discounts to WCS pricing. Fitch expects MEG to be neutral to slightly negative using a USD42/bbl WTI price assumption for 2021, although Strip prices suggest positive FCF. MEG's continued focus on cost reduction, opportunistic hedging program, and relatively low cost (approximately USD5/bbl) to sustain production levels should allow it the company to fund its capital program within operating cash flow. Growing Exposure to USGC: Fitch anticipates MEG will sell an increasing portion of its production into the more valuable U.S. Gulf Coast (USGC) and move away from the Western Canada market. MEG sold 27% of its 2018 production into the USGC, and Fitch is estimating that the apportionment will range from 30%-35% for the remainder of 2020 and 2021. MEG currently has a 100,000bbl/d of committed capacity on the Flanagan South/Seaway pipeline that transports crude to the Gulf Coast. The commitment is not contingent on the Enbridge Line 3 replacement project being placed into service or Enbridge's current contract discussions. This should result in increasing Gulf Coast sales to over 50% of production in 2021 from through pipeline, which should allow for a higher realized price for MEG's products. The USGC market has an approximate USD3.00-4.00 per barrel premium to the Western Canadian market after taking into account transportation costs in the current pricing environment. Pipeline Political Risk: There has been substantial timing risk around major pipeline projects in Canada, which have experienced numerous delays due to entrenched social and environmental opposition. These include Enbridge's Line 3 replacement (over 370,000bbl/d in incremental shipping capacity), the Keystone XL pipeline (over 830,000bbl/d) and the Trans Mountain Pipeline (over 590,000bbl/d). Pipeline delays were a key factor in the collapse in WCS differentials in the fall of 2018, which led to the need for quotas. As stated above, additional delays in new capacity could prolong the quota, create additional project deferrals, and increase reliance on rail to move product. Fitch expects that Enbridge's Line 3 will be the first of the major projects to come online in 2H20. Adequate Liquidity, Maturity Runway: MEG has an undrawn CAD800 million revolving credit facility and CAD500 million letter of credit facility with a maturity date of July 30, 2024. There is no financial maintenance covenant unless the revolver is drawn in excess of 50%, which would trigger a first-lien net debt/EBITDA covenant of 3.5x or less. Fitch does not expect material draws on the revolver given the expectation of FCF neutrality in 2021 and sufficient cash on hand. Fitch is comfortable with the liquidity given cash was at CAD49 million as of Sept. 30, 2020 and Fitch's expectation that the company will generate FCF over the forecasted horizon. The next bond maturity is not until January 2025. Derivation Summary Baytex Energy (B/Negative) is a predominately Canadian producer with production of 77,800 bbl/d in 3Q 2020, which is slightly higher than MEG's production of 71,500. Fitch expects MEG's production to grow to the 86,000 to 90,000 bbl/d range throughout the forecast period. MEG has a larger proved reserve base and a higher oil cut. In addition, MEG has no near-term financing risk, is not expected to borrow off of its CAD800 million revolver in the near term, and has a covenant-lite revolver that is not subject to a borrowing base redetermination. Baytex's next bond maturity is June 2024 and approximately 60% of its credit facility is drawn. Offsetting considerations include low diversification, given that MEG is essentially a single-play oil sands producer, and significant exposure to volatile WTI-WCS price differentials, given the lack of integration, particularly in relation to larger Canadian oil sands operators such as Suncor Energy and Canadian Natural Resources Limited. Despite its lack of diversification, MEG has substantial proved and probable reserves and has the ability to greatly expand capacity if industry conditions are favorable. Key Assumptions --Base case WTI oil prices of USD38 in 2020, USD42 in 2021, USD47 in 2022, and a long-term price of USD50; --Base case Henry Hub natural gas price of USD2.10 in 2020 and a long-term price of USD2.45; --Production decline of 12% in 2020 and growth of 7% in 2021; --Capex of CAD150 million in 2020 and CAD288 million in 2021; --No share repurchases, equity issuance, acquisitions, or divestitures. Key Rating Recovery Assumptions: --The recovery analysis assumes that MEG Energy would be reorganized as a going-concern (GC) in bankruptcy rather than liquidated. --Fitch has assumed a 10% administrative claim. GC Approach MEG's GC EBITDA assumption reflects Fitch's projections under a stressed case price deck, which assumes WTI oil prices of USD34.00 in 2020, USD32.00 in 2021, USD37.00 in 2022, and USD47.00 in 2023. The GC EBITDA estimate reflects Fitch's view of a sustainable, post-reorganization EBITDA level upon which we base the enterprise valuation (EV). The GC EBITDA assumption uses 2023 EBITDA, which reflects the decline from current pricing levels to stressed levels and then a partial recovery coming out of a troughed pricing environment. The model was adjusted for reduced production and varying differentials given the material decline in the prices from the previous price deck. An EV multiple of 5.0x EBITDA is applied to the GC EBITDA to calculate a post-reorganization enterprise value, resulting in a valuation of CAD2.9 billion. 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 5.6x and a median of 6.1x; --There were very few recent Canadian M&A transactions and multiple detail was either unavailable or not relatable; --Fitch uses a multiple of 5x, to estimate a value for MEG to reflect the relatively higher proved reserves that reduces resource and volumetric risks and provides for longer-term cash flow support despite shorter-term market impacts; 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. Despite the lack of Canadian E&P peer companies, the announced transaction in which Devon Energy (NYSE:DVN) is selling its Canadian assets to Canadian Natural Resources is a very strong comparison given the facility's location, size, and similar operations. That asset was sold for USD2.8 billion during a difficult M&A environment, which makes the transaction a good proxy for a distressed sale. The value per production (boe) was USD22,000, which implies a valuation for MEG at USD2.7 billion. After including accounts receivable and inventory and adjusting for foreign exchange rates, the liquidation value was CAD3.0 billion, less than the going concern value. The revolver is assumed to be fully drawn upon default. The revolver is a first lien and senior in the waterfall. The allocation of value in the liability waterfall results in recovery corresponding to 'RR1' recovery for the first lien revolver and a recovery corresponding to 'RR1' for the senior second lien notes. The senior unsecured notes have a 'RR3' recovery. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: --Actual debt reduction through the application of FCF proceeds; --Mid-cycle debt/EBITDA in the 3.0x-3.5x range; --Mid-cycle lease adjusted net leverage less than 3.5x. Factors that could, individually or collectively, lead to negative rating action/downgrade: --Change in financial policy away from debt reduction at current credit metrics; --Mid-cycle debt/EBITDA above 4.5x; --Mid-cycle lease adjusted net leverage greater than 4.5x; --Prolonged dislocation in WTI-WCS spreads. 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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit Liquidity and Debt Structure Adequate Liquidity: MEG has CAD49 million of cash on hand as of Sept. 30, 2020. The credit facility consists of a CAD800 million revolver and a CAD500 million letter of credit facility that matures on July 30, 2024. There is no financial maintenance covenant unless the revolver is drawn in excess of 50%, which would trigger a first-lien net debt/EBITDA covenant of 3.5x or less. The next maturity is in 2025 when the 6.5% senior secured second lien notes are due. Date of Relevant Committee 19 March 2020 REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations MEG Energy has an ESG Relevance Score of '4' for Exposure to Social Impacts, due to high exposure to pipeline and logistics takeaway capacity, which has been delayed multiple times due to social resistance to pipelines in Canada. This has widened the Canadian oil price differential to record levels, which has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors. 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 MEG Energy Corp. ----senior unsecured; Long Term Rating; New Rating; B+ Contacts: Primary Rating Analyst John Kempf, CFA Senior Director +1 646 582 4710 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Rating Analyst Mark Sadeghian, CFA Senior Director +1 312 368 2090 Committee Chairperson Dino Kritikos, Senior Director +1 312 368 3150 Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: Additional information is available on Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Corporate Monitoring & Forecasting Model (COMFORT Model), v7.8.0 (1 ( Additional Disclosures Dodd-Frank Rating Information Disclosure Form ( Solicitation Status ( Additional Disclosures For Unsolicited Credit Ratings ( Endorsement Status ( Endorsement Policy ( ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS (HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS). IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT ( DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY ( MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR WHICH THE LEAD ANALYST IS BASED IN AN ESMA- OR FCA-REGISTERED FITCH RATINGS COMPANY (OR BRANCH OF SUCH A COMPANY) CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH RATINGS WEBSITE. Copyright © 2021 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see, other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.

Fitch Rates MEG Energy's Proposed Senior Unsecured Notes 'B+'/'RR3'

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email