RANGER OIL CORPORATION
Fitch Ratings has affirmed the 'B-' Long-Term Issuer Default Ratings for
The Rating Outlook is Stable. Fitch also affirmed the senior secured reserve-based lending (RBL) credit facility at 'BB-'/'RR1' and the 2026 senior unsecured notes at 'B'/'RR3'. Using Fitch's PSL criteria, we equalize the ratings between stronger subsidiary,
Ranger's rating reflects the company's liquids-weighted assets in the Eagle Ford which support margins, advantaged
Offsetting factors include the company's relatively small production size and improving asset base which heightens the need for a credit-conscious capital allocation policy to extend inventory life and alleviate future liquidity and refinance risks.
Key Rating Drivers
Smaller Producer: Ranger's production level is of higher importance to its overall IDR as smaller producers typically have less resilience during weaker points in the commodity cycle in terms of both its ability to maintain development plans and access to capital. Ranger's 1Q22 production was 37,752 boepd which is consistent with the 'B-' rating category range.
Liquids-Rich Asset, Improving Long-Term Inventory: Fitch believes Ranger's asset base is well positioned given its concentrated, liquids-rich footprint in the Eagle Ford and advantaged
Management has identified approximately 1,000 drilling locations at YE 2021, which assuming approximately 60-65 gross well spuds per year, implies an inventory life of approximately 16 years. Approximately two-thirds of those locations, representing approximately eleven years of inventory life, are estimated to have a breakeven economics of
Credit-Positive Transactions: Fitch believes the announced 2022 acquisitions are credit-accretive and will allow Ranger to maintain its sub-1.0x leverage profile. The first acquisition adds approximately 17,000 net acres in the Eagle Ford along with 19 miles of share leaseline with Ranger's current acreage which will enhance the company's existing development plans through longer-lateral wells and increase working interest. The subsequent announced acquisition is largely composed of additional working interest in existing Ranger-operated wells along with contiguous producing assets and undeveloped acreage.
Total acquisitions announced YTD are expected to add approximately 1,600 boepd (79% oil, 92% liquids) primarily associated with low-decline legacy wells. Fitch believes the transaction is in-line with the company's growth strategy and expects the company maintain a credit-conscious funding policy when evaluating future M&A transactions.
Positive FCF, Sub-1.0x Leverage: Fitch's base case forecasts FCF generation of approximately negative
Strong Hedge Book Supports Cash Flow Visibility: Fitch expects the company will continue to hedge future production at similar levels to reduce pricing volatility, support FCF generation and improves overall financial flexibility. This substantial PDP hedge coverage mimics the pay-out profile of its wells to lock-in returns and also mitigates downside pricing risks. From 2Q22 to YE 2022, per Fitch forecast, Ranger has approximately 50% and 75% of its expected oil and gas production hedged, along with approximately 20% and 50% of oil and gas production respectively for 2023.
Derivation Summary
Ranger's Q1/22 production was 37.7 mboepd (86% liquids) which is much larger than
The company benefits from strong gulf coast pricing and more advantaged market access, which typically leads to unhedged realized prices higher than Fitch's E&P peer average. Fitch-calculated operating costs of
Fitch expects Ranger to maintain its conservative leverage metrics with Fitch-calculated debt/EBITDA less than 1.0x in 2022, better than ~1.0x for both
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
WTI (USD/bbl) of
Organic production growth in high single digits through the forecast;
Annual Capex of approximately
Proposed 3Q22 dividend maintained through the forecast;
Assumes
Stress Case:
WTI (USD/bbl) of
No share buybacks beyond those incurred to date in 2022;
Dividend stopped at the end of FY22.
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that Ranger would be reorganized as a going-concern in bankruptcy rather than liquidated;
Fitch has assumed a 10% administrative claim.
Going-Concern (GC) Approach
The GC EBITDA estimate reflects Fitch's view of a sustainable, post-reorganization EBITDA level upon which its bases the enterprise valuation, which reflects the decline from current pricing levels to stressed level and then a partial recovery coming out of a troughed pricing environment. Fitch believes that a weakened commodity price environment and further loss of operational momentum could weaken the FCF profile and potentially lead to additional borrowings under the RBL and an erosion of the liquidity profile.
An enterprise value multiple of 3.5x 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 value of Ranger's high-quality, liquids-weighted asset base in the Eagle Ford in addition to relatively flat growth embedded in the bankruptcy scenario.
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 within the Eagle Ford basin including multiples for production per flowing barrel, proved reserves valuation, value per acre and value per drilling location. Fitch has assumed the lower production per flowing barrel-based valuation estimated to be the most conservative.
RBL is assumed to be fully drawn upon default, given the company's hedge position as well as Fitch's expectation that production growth would likely offset the risk of price-linked borrowing base reduction. The RBL is senior to the unsecured notes in the waterfall.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Production growth resulting in average daily production approaching 50 Mboepd while maintaining adequate inventory life;
Mitigate future liquidity and refinance risks through cash retention and/or economic reserve life extension;
Mid-cycle debt/EBITDA sustained at or below 2.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Loss of operational momentum resulting in average daily production approaching 20 Mboepd;
Inability to mitigate future liquidity and refinance risks through cash retention and/or economic reserve life extension;
Mid-cycle debt/EBITDA sustained at or above 3.0x.
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
Adequate Liquidity, Clear Maturity Profile: Ranger had
Simple Debt Structure and long-date maturities: The company's debt consists of a
The floating rate RBL facility has a borrowing base that is subject to semi-annual redeterminations. At the most recent redetermination in
Issuer Profile
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
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.
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