Fitch Ratings has assigned a first-time 'BB-' Long-Term Issuer Default Rating (IDR) to TG Natural Resources LLC (TGNR), and has upgraded Rockcliff Energy II LLC's rating (Rockcliff) to 'BB-' from 'B+'.

Fitch has also assigned 'BB+'/'RR1' ratings to Rockcliff's new senior secured reserve-based lending (RBL) credit facility and affirmed the 'BB-'/'RR4' ratings for Rockcliff's current senior unsecured notes.

In addition, Fitch has affirmed and withdrawn the 'BB+'/'RR1' ratings for Rockcliff's $900 million senior secured RBL credit facility following repayment at closing. The Rating Outlook is Stable.

TGNR's rating, following the closing of the Rockcliff acquisition on Dec. 28, 2023, reflects the company's strong strategic owner with $1.35 billion equity injection, sizeable proforma production of approximately 1.3 BCFE/d in 2024 and 5.1 TCFe of proved reserves in the Haynesville basin. The ratings also reflect Fitch's forecast positive FCF, over 12 years of drilling inventory at Fitch's mid-cycle price, and projected debt reduction to maintain sub-2.0x EBITDA leverage profile. Offsetting factors include TGNR's size and scale, and the need to further de-risk its East Texas acreage.

Fitch has withdrawn the rating on Rockcliff's senior secured reserve-based lending credit facility following its termination at the close of the acquisition.

Key Rating Drivers

Strong Strategic Owner: Under Fitch's parent-subsidiary linkage criteria, TGNR's IDR receives a one-notch uplift due to the moderate linkage between the company and its parent Tokyo Gas. The linkage reflects the lack of strong legal ties (debt guarantees, cross defaults), moderate strategic ties given TGNR's overall financial contribution and weak operational ties since the companies have integrated management personnel; however, operational benefits to Tokyo Gas are weaker.

While Fitch does not rate Tokyo Gas, the company has a solid investment grade credit profile. The investment in TGNR is of moderate strategic importance to Tokyo Gas, as a notable component of its Compass 2030 to backward integrate through the LNG value chain. Tokyo Gas's investment in TGNR is long term, strategic, and not focused on equity distributions.

Strong Haynesville Focus: Proforma TGNR will be the second largest private producer in the Haynesville Shale Basin, and is well positioned for the expected growth of LNG capacity on the Gulf Coast. The Haynesville basin is located close to the Henry Hub and other major natural gas buyers, which provides for lower differentials and higher realized gas prices. Proforma, TGNR's core acreage in East Texas and North Louisiana portion of the Haynesville basin totals 384,000 net acres, which equates to approximately 12 years of drilling inventory, based on drilling inventory at Fitch's mid-cycle price.

While the East Texas portion of the basin has less operating history, reservoir characteristics lead to lower development costs and decline rates. Offset operator Comstock Resources Inc.'s (B+/Stable) production results at wells in East Texas are generally consistent with the average IP of its recent Louisiana wells, somewhat mitigating geological and volumetric risk in the region.

Positive FCF and Improved Liquidity: Fitch believes proforma TGNR can generate positive FCF throughout the base case given its low operating cost structure and no current expectations for the initiation of a dividend. Fitch assumes no dividend program with a focus on debt reduction through the forecast. The RBL maturity is not until December 2027 and the Rockcliff bond maturity is not until 2029, providing the company with extensive runway. Given Fitch expects Rockcliff to generate material positive FCF over the forecast period, this should further bolster liquidity.

Continued Absolute Debt Reduction: Under Fitch's current Base Case pricing, Fitch expects TGNR to use its positive FCF for absolute debt reduction in the near term following the Rockcliff acquisition. This includes repaying the RBL facility given the company's high absolute debt levels following the Rockcliff acquisition. Under Fitch's model, EBITDA leverage is expected to be 1.9x by year-end 2024, before declining towards 1.0x in the outer years of the forecast.

Hedging Strategy Reduces Price Risk: TGNR has implemented a multiyear hedging strategy to limit downside commodity price risk on completion of the acquisition. Under the RBL facility, TGNR has to hedge a minimum of 60% of gas PDP volumes for months 1-12 and 40% for months 13-24, which is tested quarterly. Fitch expects the company to maintain its hedging program to de-risk cash flows and reduce pricing volatility.

Derivation Summary

Following the Rockcliff acquisition, TGNR's production will rise to just under 1.3 BCFE/d in 2024, which is below Comstock Resources (B+/Stable; 1,420 mmcfe/d), Chesapeake (BB+/Positive; 3,495 mmcfe/d) and CNX Resources (BB+/Stable, 1,559 mmcfe/d). The proforma company has proved reserves of 5.1 TCFE which is lower than Comstock (6.7 TCFE at YE 22) and CNX (9.8 TCFE at YE 22).

Proforma, the company is expected to continue to achieve favorable netbacks due to its low operating cost profile and proximity to Henry Hub and Gulf Coast demand centers. Additionally, Fitch expects the TGNR's EBITDA leverage to be approximately 1.9x at YE 24 proforma the Rockcliff acquisition, which is higher than the peer group, expected to reduce over the forecast.

Key Assumptions

WTI oil price of $75/bbl in 2024, $65/bbl in 2026, $60/bbl in 2027 and $57/bbl thereafter;

Henry Hub natural gas price of $3.25/mcf in 2024, $3/mcf in 2025 and $2.75/mcf thereafter;

Production increased above 1.25 bcfe/d in 2024 following the closing of the acquisition and mid-to-low single digit decline from 2025 as TGNR focusses on RBL reduction following the acquisition;

Capex of $650 million in 2024 and reduces to approximately $500 million in the outer years of the forecast;

Assumed no dividend payment;

No material M&A activity following the Rockcliff acquisition.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Material increase in size and scale with an emphasis on diversification;

Commitment to its stated financial policy, resulting in consistent positive free cash flow generation;

Mid-cycle EBITDA leverage consistently below 2.0x.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Inability to generate FCF and failure to reduce the RBL borrowings that materially erodes the liquidity profile;

Loss of operational momentum resulting in production consistently below 1.0 BCFE/d;

Change in financial policy that results materially weaker credit metrics;

Mid-cycle EBITDA leverage consistently at or above 2.5x.

Liquidity and Debt Structure

Proforma the Rockcliff acquisition, TGNR's debt will be under Rockcliff and consist of approximately $971 million first-lien RBL ($1,350 million elected commitment) due 2027 (four-year extension from closing), and senior unsecured bonds ($700 million) due 2029.

As a result of the transaction, TGNR's liquidity position at close is expected to be approximately $35 million of cash on the balance sheet and $378 million available under the RBL to support negative FCF. Fitch believes TGNR's liquidity position is comfortable following the transaction, and considering the forecast positive FCF generation in the ratings case.

Issuer Profile

TG Natural Resources LLC is a private U.S.-based independent exploration and production (E&P) company focused on the development of natural gas properties in the Haynesville shale formation in East Texas and North Louisiana.

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

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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