DBRS Updates Report on Southern Pacific Resource Corp.

DBRS has today updated the rating report of Southern Pacific Resource Corp. (STP or the Company). The Issuer Rating and the rating of the Senior Secured Second Lien Notes (the Notes) remain Under Review with Negative Implications. STP’s Issuer Rating is CCC and the rating of the Notes is CCC (low). The recovery rating of the Notes remains at RR5. STP’s current rating reflects the continued disappointing production results, particularly at STP-Mckay, and the limited liquidity available to support operations. However, STP’s liquidity position as of June 30, 2014 (approximately $29.4 million available, including cash, and net of non-cash working capital and restricted cash) remains at relatively similar levels to DBRS’s pro forma expectations at the time of its negative rating action on December 12, 2013. DBRS notes that in the event that the Company pursues some form of restructuring, or if there is further material deterioration in liquidity in the immediate future, which may be a result of continued operational challenges and/or inability to raise additional liquidity, further negative rating action over the near term may result.

During the 2014 fiscal year (F2014), the Company raised additional liquidity through the sale of non-core assets for approximately $22 million and by raising USD 136.2 million under a five-year first lien term loan (Term Loan). The Term Loan was used to repay and replace the revolving credit facility, which had an
$85 million availability limit. However, DBRS expects the Company to face a significant cash drain by the end of December 2014 and January 2015, as interest on the Term Loan, Notes and convertible unsecured debentures (the Debentures) come due (see the Debt and Liquidity section for more details). Total interest payments during that time horizon total approximately $20 million, which represents a significant portion of the Company’s current liquidity. The ability to overcome the ongoing operating challenges and/or raise additional liquidity over the near term will be critical in meeting these upcoming financial obligations.

On December 12, 2013, DBRS downgraded the Issuer Rating of STP to CCC and the ratings of the Notes to CCC (low). DBRS also placed all ratings Under Review with Negative Implications and changed the recovery rating of the Notes to RR5 from RR4. The rating action at the time reflected the material change in the Company’s business risk profile and also followed the Company’s announced strategic review process. On August 21, 2014, STP announced the conclusion of its strategic review and concluded that none of the proposals received were acceptable. As a result, the Company will continue with the development of its existing assets. Ongoing operational challenges at STP-McKay (2,064 barrels per day (b/d) in July 2014 versus design capacity of 12,000 b/d) have continued to negatively affect the Company’s liquidity.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.