Citing “sizable available liquidity,” Moody’s Investors Service on Friday confirmed the debt ratings of El Paso Corp. and its subsidiaries as “stable” and put its speculative grade liquidity rating at SGL-3, which is defined as “adequate.”

“Liquidity was the driving factor behind our confirming EP’s long-term fundamental ratings,” said Moody’s analysts. “These rating confirmations acknowledge EP’s…liquidity that appears adequate to meet its foreseeable near-term cash obligations and affords it some time to restructure its credit.” Analysts noted they expect the company to renew its credit facility later this month, “an important step in this regard.”

The rating actions, said analysts, “recognize EP’s progress in its asset sale program that has allowed the company to ease its debt burden, sustain a large liquidity position, reduce its working capital needs and improve its business risks.” However, they noted that the ratings “are restrained by its high leverage that is unlikely to go down to any significant degree from organic means, given the lack of post-capital expenditure free cash flow.

“We remain concerned about the continuing declines in its exploration and production (E&P) volumes that will take some more time to arrest,” said Moody’s analysts. “Stabilizing E&P volumes is a critical rating factor for EP, because E&P is a large component of earnings before interest and taxes (EBIT) and thus a key driver for the pace of EP’s financial recovery and growth.”

The ratings are supported by “durable cash flows from its pipeline segment” (about 55% of total EBIT), which comprises most of the company’s enterprise value. However, pipeline free cash flows “will be insufficient” by themselves “to support all of $1.6 billion of consolidated interest expense, plus roughly $200 million for cash taxes and dividends to offset any losses of EP’s remaining non-core and marketing businesses.”

The company’s E&P is the other core business, which generates about 40% of total EBIT, “but this would not be sustainable if volumes continue to decline, and if commodity prices fall from their current levels.” Analysts said that over the near term, “we expect EP to step up reserve acquisitions,” and to maintain current ratings; “such acquisitions would need to be sufficiently equity-financed to cushion their related risks. Given its rapidly depleting reserve base and consequent reinvestment requirements, we do not consider E&P to be a reliable source of free cash flows for the corporation.”

The company is unlikely to generate free cash flows to organically reduce leverage “for some years.” Analysts also noted the “extraordinary scope of EP’s reserve revisions and restatement of its financial statements that highlights a legacy of deficiencies in its internal controls, which EP is making progress in remediating. However, it will take time to demonstrate the effectiveness of those actions, and it is possible that the company will identify additional deficiencies that need to be remediated.”

The company “remains prone to event risk,” but analysts said it is likely there will be “sufficient internal and external capital resources to meet its obligations and its ratings will not go down from current levels.”

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