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TEXT-S&P raises Rosetta Resources rating to 'B+'
March 14, 2012 / 9:33 PM / 6 years ago

TEXT-S&P raises Rosetta Resources rating to 'B+'

March 14 - Overview	
     -- U.S. oil and gas exploration and production (E&P) company Rosetta 	
Resources is allocating a majority of its capital to oil-weighted drilling in 	
the Eagle Ford.	
     -- We are raising our corporate credit rating on Rosetta to 'B+' from 'B' 	
and raising our issue-level rating on Rosetta's senior unsecured notes to 	
'BB-' from 'B+'.	
     -- The stable outlook reflects our expectation that the company will 	
improve its proved developed reserve base to above 40% of total reserves.	
	
Rating Action	
On March 14, 2012, Standard & Poor's Ratings Services raised its corporate 	
credit rating on Houston-based Rosetta Resources Inc. (Rosetta) to 'B+'
from 'B'. The outlook is stable.	
	
At the same time, we raised the senior unsecured rating to 'BB-' (one notch 	
higher than the corporate credit rating) from 'B+'. The recovery rating 	
remains '2', indicating our expectation of substantial (70% to 90%) recovery 	
in the event of a payment default.	
	
Rationale	
The upgrade on Rosetta reflects our expectation that robust oil prices and its 	
oil-weighted capital spending program in 2012 will benefit its proved 	
developed reserve base. We anticipate that Rosetta will increase its 	
proportion of proved developed reserves, which were small at about 36% of its 	
965 billion cubic feet equivalent (Bcfe) reserve base at year-end 2011. The 	
company intends to allocate about 90% of its $640 million budget to the 	
oil-rich Eagle Ford basin this year, and we think that this program is likely 	
to improve its proved developed reserve base to above 40% of total proved 	
reserves. We consider this level to be appropriate for the 'B+' rating 	
category. 	
	
The ratings on Rosetta reflect Standard & Poor's view of its relatively small 	
proved reserve base relative to peers, its aggressive growth strategy, and its 	
reliance on one location (Eagle Ford) for much of its future growth. Our 	
ratings also reflect its exposure to robust crude oil prices and its healthy 	
credit protection measures. We consider its business risk to be "weak" and its 	
financial risk "aggressive" (as our criteria define these terms). 	
	
The company is limited to the Eagle Ford for a majority of production and 	
intends to spend a majority of its 2012 capital budget in the basin this year. 	
While we view the Eagle Ford favorably because of its high condensate mix, 	
Rosetta's aggressive capital spending program there means the company will 	
become highly reliant on one basin for much of its future cash flows, which it 	
uses to service debt and other obligations. We expect that this investment in 	
the Eagle Ford will leave liquids (crude oil and natural gas liquids ) 	
as a percentage of total production to be about 57% at the end of 2012 and 60% 	
at the end of 2013 (in the fourth quarter, about 49% of production was tied to 	
liquids).	
	
Rosetta has one of the lowest cost structures in its rating category, with 	
cash costs as of Dec. 31, 2011, of about $1.91 per million cubic feet 	
equivalent (Mcfe) and a levered breakeven cost inclusive of three-year all in 	
finding and development (F&D) of slightly less than $3.50/Mcfe (similarly 	
rated peers are typically about $3 or more and near $6 or more, respectively). 	
The low cost structure has historically benefitted from the company's 	
contiguous nature of positions in its basins, leading to somewhat lower 	
development costs compared with its peers. Rosetta's rising oil and natural 	
gas liquids (NGL) production out of the Eagle Ford will lead to higher lease 	
operating expenses (LOE), in our estimation, but increasing, more profitable, 	
condensate production should amply offset cost increases. 	
	
As of Dec. 31, 2011, the company had about $282 million of adjusted debt 	
(inclusive of operating lease commitments and asset retirement obligations). 	
We expect leverage to be about 1x over the next year based on our price deck 	
for natural gas of $3.00/Mcf in 2012 and $3.25/Mcf in 2013 and for oil of 	
$80/barrel in 2012 and $70 thereafter, and assuming production growth of more 	
than 40% in 2012 to approximately 230 million cubic feet equivalent per day 	
(MMcfe/d) and more than 25% growth in 2013. As of Dec. 31, 2011, Rosetta had 	
hedged about a third of our forecasted daily production in 2012 (including 	
about 20% of its gas) and approximately 10% of forecasted 2013 production 	
hedged (no hedges on gas production). Using these assumptions, we project 	
EBITDA for full-year 2012 will be more than $500 million and that for 2013 it 	
will total more than $600 million. We forecast funds from operations (FFO) in 	
2012 will total approximately $400 million and in 2013 will be more than $475 	
million. 	
	
Rosetta has announced that, inclusive of growth capital, it will spend $640 	
million in 2012, with more than 90% targeted to the Eagle Ford. We are 	
forecasting 2013 capital spending inclusive of growth spending at $600 million 	
to $700 million. Coupled with our expectation that annual cash interest will 	
total approximately $25 million, we project that Rosetta will outspend cash 	
flows by more than $100 million in both 2012 and 2013. We believe that current 	
liquidity is sufficient to cover this shortfall.	
	
Liquidity	
We consider Rosetta's liquidity to be "adequate", reflecting the following 	
assumptions and expectations:	
	
     -- As of Dec. 31, 2011, the company had $47 million of cash. In early 	
2012, its borrowing base availability was $245 million on its $325 million 	
facility maturing May 10, 2016. 	
     -- We think Rosetta will spend $640 million in 2012 and nearly $700 	
million in 2013. At this level, we believe sources of liquidity will exceed 	
uses by more than 1.2x over the next several years and that net sources of 	
liquidity will remain positive even if EBITDA declines by more than 20%.	
     -- We believe that Rosetta could absorb, without refinancing, a 	
high-impact, low-probability event and view its relationship with banks as 	
well-established and solid.	
     -- The company has a maximum debt to EBITDAX (earnings before interest, 	
taxes, depreciation, amortization, and exploration expenses) covenant of 4x. 	
At our price assumption for natural gas and oil, we do not expect Rosetta to 	
have any issues meeting these requirements over the next several years.	
	
Recovery analysis	
For the complete recovery analysis, please see our recovery report on Rosetta 	
published Sept. 15, 2011, on RatingsDirect. 	
	
Outlook	
The stable outlook reflects our view that Rosetta will continue to benefit 	
from robust oil prices and that its capital spending program in the Eagle Ford 	
will result in further development of its proved reserves. Given its 	
increasing oil production, we foresee Rosetta maintaining credit protection 	
measures that are strong for the current rating, with year-end leverage 	
projected to be below 1x. 	
	
We could lower the rating if Rosetta exceeds leverage of 4.5x, a level that 	
would require an 84% decline based on annualized fourth quarter EBITDA. We 	
consider this unlikely given Rosetta's exposure to oil prices. 	
	
Related Criteria And Research	
     -- Key Credit Factors: Global Criteria For Rating The Oil And Gas 	
Exploration And Production Industry, Jan. 20, 2012	
     -- Revised Assumptions For Assigning Recovery Ratings To The Debt Of U.S. 	
Oil And Gas Exploration And Production Industry, Sept. 30, 2010	
	
Ratings List	
Upgraded; Outlook Stable	
                                        To                 From	
Rosetta Resources Inc.	
 Corporate Credit Rating                B+/Stable/--       B/Positive/--	
 Senior Unsecured                       BB-                B+	
  Recovery Rating                       2                  2	
	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at 	
www.standardandpoors.com. Use the Ratings search box located in the left 	
column.

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