Aug. 21--TWIN FALLS -- Moody's Investors Services, a top credit rating firm, has downgraded the financial outlook of Idaho's leading natural gas explorer.
Conservationists expressed alarm, considering that Bridge Resources went belly up in 2011 on more than $20 million of investments in Idaho's budding natural gas play in Canyon and Payette Counties. A rotating cast of oil and gas explorers -- recently seen elsewhere in the nation -- opens the door wider for potential environmental damage, they contend.
An Idaho official with the Texas-based Alta Mesa, which took over operation of Bridge's assets, downplayed Moody's June rating, saying it does not accurately capture the company's overall financial strength or recent production growth.
The news is of note, as the Idaho Oil and Gas Conservation Commission soon will consider beefing up rules designed to protect the environment should a hydrocarbon explorer default without first properly securing the wells it drills.
This is the second recent round of such rulemaking, which seeks to better regulate an industry that skirted the state for more than a century. Modern developers have explored Idaho for about a decade, drilling 14 wells, nine of which are thought to have production potential and one that is producing. Trendwell Energy Corp. is also exploring Idaho, but it's not as large as Alta Mesa.
"We went through this with Bridge two years ago and thought we knew what to expect from Bridge and then -- poof -- they are gone," said Justin Hayes, Idaho Conservation League program director. "The companies say, 'Trust us,' but if they are just a blinking light -- one company one day, and another the next day -- who are we talking to? And doesn't that argue for the state having very protective and stringent rules because there is no way to say what the intentions of the next company will be?"
Moody's analyst Sajjad Alam downgraded Alta Mesa's financial outlook from "stable" to "negative." The agency has two other outlook grades -- positive and developing.
Alam also reaffirmed Alta Mesa's status as a B2-rated company. B2 falls under Moody's speculative grade -- as opposed to the more desirable investment grade. The rating means the company is "subject to high credit risk." The rating is 15th of the rating agency's 21 notches, ranging from highest at AAA to lowest at C.
Moody's wrote that the rating reflects Alta Mesa's high leverage, risky plans to drill in Oklahoma and "significant negative free cash flow through 2015."
"Despite significant capital spending and considerable growth in liquids production since 2011, Alta Mesa has not achieved the scale or the level of cash flow that are comparable to other B2-rated (oil and gas) companies," Alam said. "On the contrary, heavy outspending over the past several years has pushed leverage higher, and the company has struggled to maintain production and reserves."
Alta Mesa spokesman John Foster stressed that Moody's did not understand the company's debt structure and a recent recapitalization effort, which Alam wrote was a "clear credit negative, as it placed another layer of debt on the same asset base and added complexity to (its) capital structure."
Foster said the rating is only temporary, and Alta Mesa is confident it "will go back to the strong bond rating with Moody's that they enjoy with other companies," he said. "Anybody who claims otherwise, that there is something about our company for which there should be concern, simply doesn't understand finance."
Alma Hasse, co-founder of Idaho Residents Against Gas Extraction, said Moody's rating was "tremendously" concerning.
"There are no protections in place at the county level, and I would argue at the state level, if something ... catastrophic happened, like contamination of an aquifer," she said. "As much as Alta Mesa is on shaky financial ground, where are they are going to get the financial wherewithal to correct a problem if it were to happen? What they would do is just file bankruptcy and leave the county and the state taxpayers holding the bag."
Increased Production to the Rescue?
Foster cited increased production and revenue detailed in the company's second quarter report, which was released in mid-August on the heels of Moody's report. Revenues totaled $115.4 million, up $18.7 million, or 19 percent, compared with the same time last year, the company said.
Alta Mesa produced 18,400 barrels of oil equivalent (BOE) a day in this second quarter, up from 17,300 BOE the same time last year.
Moody's noted that Alta Mesa's production was at 17,200 in the first quarter, which was significantly down from its peak of 19,000 BOE in 2011, "despite significant capital spending and acquisitions" over the past two years.
Alta Mesa predicted it would grow production to 20,000 to 22,000 BOE in this third quarter, but Moody's said it would only consider a rating upgrade if the company increased production to more than 35,000 BOE.
Higher production levels insulate oil and gas companies -- especially those with a lot of debt -- from risk caused by volatile market prices. Many wildcat explorers raise significant capital to explore when oil and gas prices are high. When prices fall, or production falls short, many default and are cannibalized.
While Bridge befell that fate, Alta Mesa won't, Foster said. Bridge was a small, highly leveraged company that had few if any reserves. Alta Mesa, however, is a mature, experienced company.
"Their finances are so strong that they are one of the few energy and production companies to qualify for the public bond market," Foster said. "They are held to extremely strict financial standards ... and have consistently met those guidelines year after year."
Hayes said he doesn't buy it. "We are no more comfortable with this company than we were with Bridge."
Conservationists have pushed for companies to post higher bonds for the wells they drill that become inactive after two years. Beyond a standard $10,000 starter bond, the state proposed to raise the per-foot-in-depth fee from $1 to $8. Idaho's energy companies have supported those measures.
The current bond price would not be enough to cover the costs if the state had to step in and plug an inactive well to ensure it is environmentally safe long-term, said Bobby Johnson, oil and gas program manager for the Idaho Department of Lands.
That rule and others were presented to the Idaho Oil and Gas Commission earlier this month and will be published Sept. 3 to start a 21-day public comment period. If approved by the commission, the rules will go to the Legislature for approval.
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