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Investing.com -- S&P Global Ratings announced today that it has lowered its issue-level rating on the second-lien notes of U.S.-based crude oil and natural gas exploration and production company, Talos Energy (NYSE:TALO) Inc. The rating was revised to ’B+’ from ’BB-’ due to a lower PV-10 value at the end of 2024 under the agency’s recovery price assumptions.
The downgrade affected two debt issuances, both as of December 31, 2024. The first is a $625 million 9.0% second-lien secured note due in February 2029, and the second is a $625 million 9.375% second-lien secured note due in February 2031.
The agency also revised its recovery rating to ’2’ from ’1’, indicating an expectation for substantial recovery of principal to creditors in the event of a payment default, estimated at 70%. This change is primarily due to the lower year-end 2024 PV-10 value.
Despite these changes, S&P Global Ratings has left Talos’ ’B’ issuer credit rating and stable outlook unchanged.
The default scenario simulated by the agency assumes a default in 2028, a period of low commodity prices, and a valuation of Talos’ reserves based on a company-provided PV10 of proved reserves as of year-end 2024. This valuation uses recovery price deck assumptions of $50 per barrel for West Texas Intermediate crude oil and $2.50 per million British thermal unit for Henry Hub natural gas.
The PV-10 valuation was lower than the previous estimate due to the timing of offshore bookings and the company’s reassessment of its drilling and development plans following the acquisition of Quarternorth Energy in March 2024.
In the event of a default, the agency expects the claims on the second-lien notes to be effectively subordinated to the claims relating to the company’s reserve-based lending (RBL) facility, which is due in March 2027 and is assumed to be drawn up to its $800 million availability cap at default.
The agency’s simulated default scenario estimates a net enterprise valuation (EV) of $1.7 billion after accounting for restructuring administrative costs, senior secured RBL claims of $787 million, and a total value available to second-lien claims of $924 million. The recovery expectations for the second-lien claims are estimated to be between 70% to 90%.
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