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Recovery Price Deck Assumptions For Exploration And Production Companies Revised

S&P Global Ratings revised its assumptions for its oil and natural gas recovery price deck, which we use to value hydrocarbon reserves for speculative-grade exploration and production (E&P) companies in our recovery analysis. While we intend these price assumptions for valuation of reserves in North America, we may use them to value reserves in other geographies as well. Where warranted, we may introduce other commodity price assumptions for specific regions.

Table 1

S&P Global Ratings' Updated Oil And Natural Gas Price Assumptions For Recovery Analysis
To From
Oil ($/barrel) (WTI) 50 50
Henry Hub - Natural gas ($/mmBTU) 2.75 3.00
WTI--West Texas Intermediate.

This change reflects a revision in our estimate of the all-in industry breakeven costs for natural gas as well as the long-term supply and demand dynamics for the industry. Approximately half of the gas production in the U.S. is associated gas production that does not adhere to the laws of supply and demand, and will be produced almost regardless of pricing as the profitability from crude oil and natural gas liquids drives production. The lower natural gas price assumption is currently in line with the base case long-term natural gas price used for our issuer credit analysis, though we generally expect the recovery price deck assumptions to be more conservative than our base-case assumptions in a healthy commodity price environment for natural gas. We also expect the recovery price deck to be more stable than our base-case assumptions.

Our approach to recovery analysis in this sector is based on our expectation that E&P companies are most likely to default during a prolonged industry downturn and our belief that the breakeven costs represent a reasonable equilibrium for commodity prices in this environment as development and production rates adjust to the difficult market conditions. We incorporate a limited degree of market-based basis differentials to reflect differences in quality or location of a company's domestic reserves relative to those benchmarks. For more details on this approach, please refer to the article "Revised Assumptions For Assigning Recovery Ratings To The Debt Of Oil And Gas Exploration And Production Companies," published Sept. 14, 2012. And watch the related CreditMatters TV segment titled, "Standard & Poor’s Revises Its Approach To Recovery Analysis For Speculative-Grade Exploration And Production Companies," dated Sept. 14, 2012.

The assumptions described in this article are effective immediately and we plan to review the recovery ratings on this sector over the next three months. Our recovery pricing revision will not affect issuer credit ratings but could affect issue-level and recovery ratings. For the most part, we expect a majority of issue-level rating changes to be limited to one notch.

This report does not constitute a rating action.

Primary Credit Analyst:Thomas A Watters, New York (1) 212-438-7818;
thomas.watters@spglobal.com

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