DBRS Downgrades Ratings on Southern Pacific Resource Corp.

DBRS has today downgraded the ratings of Southern Pacific Resource Corp. (STP or the Company) as follows: (1) the Issuer Rating to CCC from B (low); and (2) the Senior Secured Second Lien Notes (the Notes) to CCC (low) from B (low). DBRS has also changed the recovery rating of the Notes to RR5 from RR4. In addition, all ratings have been placed Under Review with Negative Implications. These rating actions reflect the material change in the Company’s business risk profile following continued disappointing production results and the limited liquidity available to support operations.

DBRS’s original expectations were that the Company would approach its design capacity of 12,000 barrels per day (b/d) by early 2014 at STP-McKay (1,714 b/d in November 2013). This weak operating performance is largely the result of slower than expected conformance and the resulting inability, given current technology, to extract the resource at levels that are economically viable.

Overall, DBRS estimates that the Company has $34 million in liquidity post-January 31, 2014, based on the following projections:

Uses: $26 million in uses of liquidity from October 1, 2013, to January 31, 2014, consisting of (1) $2 million per month in maintenance capex; (2) $5 million of interest related to the unsecured convertible debentures (due December 31, 2013); (3) $11 million of interest related to the Notes (due January 25, 2013); and (4) $0.5 million per month in interest expense on credit facilities.

Sources: $60 million in sources of liquidity from October 1, 2013, to January 31, 2014, consisting of: (1) $3 million in monthly EBITDA; (2) cash on hand of $17 million; and (3) undrawn credit facilities of $31 million.

To alleviate operational challenges, the Company may require more liquidity than what is currently available. The inability to raise additional liquidity, given operational challenges and limited access to the capital markets, may result in further negative rating actions over the near term.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Oil and Gas Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.