Investing.com -- S&P Global Ratings has upgraded the credit rating of Houston-based oil and gas exploration and production company, Chord Energy Corp., from ’BB-’ to ’BB’. The upgrade is attributed to the company’s improved scale of proved reserves, consistent production, and robust credit measures, all while adhering to a conservative financial policy.
The company’s senior unsecured notes were also upgraded to ’BB’ from ’BB-’, while the recovery rating remains unchanged at ’3’. This rating reflects S&P’s expectation of a 50%-70% recovery of principal to creditors, with a rounded estimate of 65%.
Chord Energy Corp.’s stable outlook is based on S&P’s expectation that the company will maintain a steady development program, relatively flat production volumes, and strong credit measures over the next two years. These measures include funds from operations (FFO) to debt well over 100%.
The upgrade to ’BB’ comes after Chord’s acquisition of Enerplus Corp (TSX: ERF ). for $4.2 billion in May 2024. This transaction added about 100,000 barrels of oil equivalent (boe) per day of production and more than 300 million boe of proved reserves. The company is expected to maintain production at 265,000-270,000 boe per day in 2025 and 2026, comprising 55%-60% crude oil . This increased operating scale, including a 39% year-over-year increase in proved reserves to 883 million boe, supports the higher rating. However, the company’s high geographic concentration in the Williston Basin may expose it to regional risks.
Chord Energy has a $1.4 billion capital spending plan for 2025, which will support a drilling program of 4-5 rigs and 1-2 hydraulic fracturing spreads throughout the year. The company is also focused on improving capital efficiency, with a shift towards drilling 3-mile lateral length wells instead of its traditional 2-mile laterals. This shift is expected to improve well economics in the play. With these efficiencies and a price assumption of $70 per barrel for West Texas Intermediate (WTI) crude oil, Chord is expected to generate $800 million-$825 million of free operating cash flow (FOCF). The company’s FFO to debt is expected to remain well over 100% and debt to EBITDA below 0.5x over the forecast period.
Given its low leverage, Chord plans to return most of its FOCF to shareholders, allocating more than 75% of FOCF to shareholders after its base dividend, through share repurchases and variable dividends. The company is expected to reward shareholders with more than $600 million in 2025. A portion of discretionary cash flow after shareholder returns is anticipated to be used to repay borrowings on its reserve-based lending credit facility, which had $445 million drawn as of Dec. 31, 2024.
S&P could lower its rating on Chord Energy if the company’s credit measures weaken to the point where FFO to debt approaches 45% on a sustained basis. This could occur if commodity prices decline and the company doesn’t reduce spending, or if the company debt-finances a large acquisition. Conversely, the rating could be raised if Chord Energy expands its scale of proved reserves and production, increases geographic diversification, and maintains FFO to debt comfortably above 60%.
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