DBRS Comments on Southern Pacific Resource’s Strategic Review Announcement

DBRS today notes that Southern Pacific Resource Corp. (STP or the Company; rated CCC with ratings Under Review with Negative Implications) has announced the conclusion of its strategic review process. STP concluded that none of the proposals received were acceptable and that the Company will continue with the development of its existing assets. DBRS notes that STP currently has limited liquidity and minimal operating cash flows to support its operations ($34 million of estimated working capital as of June 30, 2014). Uses of liquidity in the near term include approximately $20 million of interest expense related to its Senior Secured Second Lien Notes (the Notes) and its First Lien Term Loan and capex aimed at increasing production rates at STP-McKay.

The Company is expected to release its year-end financial statements by the end of September 2014, at which time DBRS will again review the ratings of STP and may resolve the Under Review with Negative Implications status. However, further material deterioration in liquidity in the immediate future may result in a negative rating action prior to the end of September 2014. STP’s inability to raise additional liquidity may result in a negative rating action, given STP’s ongoing operational challenges and limited access to the capital markets.

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 following continued disappointing production results and the limited liquidity available to support operations.

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