CORPORATES CREDIT OPINION 16 December 2019 Hilcorp Energy I, L.P. Update following ratings being placed under review for downgrade Update Summary RATINGS Hilcorp Energy I, L.P. Domicile Texas, United States Long Term Rating Ba1 , Possible Downgrade Type LT Corporate Family Ratings - Dom Curr Outlook Rating(s) Under Review Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Contacts Andrew Brooks +1.212.553.1065 VP-Sr Credit Officer andrew.brooks@moodys.com Steven Wood +1.212.553.0591 MD-Corporate Finance steven.wood@moodys.com CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 On August 27, 2019, Hilcorp Energy I, L.P. (HEI) announced that it had agreed to acquire BP p.l.c.'s (BP, A1 stable) entire Alaskan upstream business, including BP Exploration (Alaska) Inc., that owns BP's upstream oil and gas interests on Alaska’s North Slope, and its interest in the Trans Alaska Pipeline System (an affiliated midstream partnership will acquire BP's Alaskan midstream assets). The total purchase price is $5.6 billion, which includes a base purchase price of $4.0 billion (less effective date adjustments), and a $1.6 earnout provision. Closing is expected in 2020’s second quarter. While HEI, which is privately held, is in the process of evaluating various financing options, we assume that the acquisition will be heavily debt-financed. Debt levels on that basis will likely exceed levels we regard as appropriate for the rating relative to the company’s cash flow, daily production volumes, and proved developed (PD) reserves, prompting the August 28 placement of HEI’s ratings under review for downgrade. HEI’s credit profile is characterized by a successfully employed strategy of investing in mature, longer-lived producing properties, and creating value through the exploitation of underperforming well characteristics. Debt levels have risen over the past year reflecting the July 2019 consolidation of sister-affiliate Hilcorp Energy Development, LP (HED, not rated) into HEI. To close the HED transaction, HEI bought out its joint venture partner, a buy-out that was debt-financed under HEI’s secured borrowing base revolving credit facility. HEI is additionally constrained by the high cash call of future development costs, such as asset retirement obligations. The company’s relative size and scale, previously a ratings constraint, will be considerably augmented by the BP acquisition. Pro forma for the BP acquisition, HEI’s proved reserves and net production attributable to Alaska will exceed 50% of its total. Our review of HEI's ratings will focus on the company's financing plans for the acquisition, its target capital structure, and its strategy and timing for deleveraging its balance sheet. The review will also assess HEI's capital spending and development strategy to successfully execute on integration and projected cost efficiencies; and the receipt of regulatory approvals and satisfying any other conditions to the closing of the acquisition. CORPORATES MOODY'S INVESTORS SERVICE Credit Strengths » Increasingly large and diversified operating profile » Successful low-cost exploitation strategy Credit Challenges » Debt leverage has been increasing » Executing on the sizable North Slope acquisition Rating Outlook The rating is under review for downgrade. A prudent mix of debt, an equity infusion, and/or alternative funding could be sufficient to maintain a Ba1 Corporate Family Rating (CFR) as the company currently has debt leverage on production, reserves and cash flow appropriate for its ratings, along with robust interest coverage. Factors that Could Lead to a Downgrade » A material increase in debt levels » A leveraging acquisition » Retained cash flow (RCF)-to-debt metric declining below 20% » Excessive level of cash distributions Factors that Could Lead to an Upgrade » Ratings are under review for downgrade Profile Hilcorp Energy I, L.P. (HEI) is a privately-held limited partnership engaged in the acquisition, production, and development of oil and gas properties. The company's assets are primarily located onshore along the Gulf Coast of Louisiana and Texas, in Alaska's Cook Inlet and North Slope, and in the Utica Shale. Mr. Jeffery Hildebrand, the company's founder, owns the vast majority of HEI's LP interests and holds a 1% general partnership interest through Hilcorp Energy Company, which manages the oil and gas operations of HEI. At June 30, 2019, HEI's total proved reserve base was 902 million Boe (37% crude oil, 72% PD). Total daily production averaged 149,500 Boe per day in 2019’s third quarter, of which 37% was crude oil and 55% was natural gas. As a function of the HED acquisition, HEI’s and HED’s operations and financial results for 2018 and September 30, 2019 have been combined at their respective book values, and retrospectively restated to the October 16, 2015 inception date of HED. Detailed Credit Considerations Debt leverage has been increasing despite historically conservative financial policies HEI’s credit metrics will weaken in 2020, pro forma for the acquisition of BP’s Alaskan assets, which we expect to be largely debt financed. Acquisitions, which have added incrementally to HEI’s production profile and proved reserves, had not previously materially impacted relative debt metrics. If the BP acquisition were to be mostly debt funded, debt levels (including Moody's standard adjustments) could approach $6 billion from the roughly $2.6 billion outstanding at September 30. Debt on production could initially exceed $25,000 per Boe, up substantially from the roughly $16,000 per Boe which has prevailed since 2017. Debt on PD reserves, at $4.45 per Boe, would also likely see a similar deterioration. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2 16 December 2019 Hilcorp Energy I, L.P.: Update following ratings being placed under review for downgrade CORPORATES MOODY'S INVESTORS SERVICE July’s HED consolidation had already increased HEI’s leverage by about half a turn, but we considered it to be within HEI’s available unused debt capacity. HED was largely debt financed by HEI with $722 million borrowed under its $1.7 billion secured borrowing base revolving credit facility. Notwithstanding the 77% of HED’s production that is natural gas, because HED’s asset base was acquired in this transaction at about a 33% discount to its 2018 PV-10, there was little dilution to HEI’s credit metrics. Debt on production and debt to PD were little changed from mid-year levels approximating $16,000 per Boe and $4.50 per Boe, respectively. HEI has consistently funded its operations within its operating cash flow, and we expect that to continue following the closing of the acquisition of BP’s Alaskan assets. The company has stated that it will focus on debt reduction after the financing of the acquisition, targeting a reduction in debt/EBITDAX to below 2.5x, utilizing its operating free cash flow for debt repayment. Distributions to its general partner, other than tax distributions, are also likely to cease, pending the achievement of lower debt levels. The company’s emphasis on liquidity management is reflected in its strong cash flow metrics. The company has historically generated high retained cash flow RCF-to-debt metrics, although distribution outflows have increased over the past several years. Strong interest coverage ratios have been maintained, exceeding 30% and 9x, respectively, at June 30. Successful low-cost exploitation strategy HEI has consistently increased reserves and production through its “acquire-and-exploit” strategy while conservatively managing its leverage in a narrow band through industry cycles. HEI has successfully employed a strategy of acquiring older, mature, long-lived properties with a base level of production, creating value by investing in and exploiting characteristically declining well performance. HEI’s production is primarily centered on a portfolio of oil and gas properties situated along the Louisiana-Texas Gulf Coast, and it has extended this strategy to Alaska's Cook Inlet and North Slope. The company's assets are comprised of large, prolific producing fields with extensive production histories and predictable performance, resulting in a large number of low productivity wells, late in their productive lives. HEI’s foray into Alaska’s North Slope initially caused overall unit operating costs to rise, although the low cost of its legacy operations and significant cost reductions achieved in Alaska are evident in HEI's aggregate field operating costs, which have typically averaged between $17-19 per Boe. With a seasoned management team, HEI has continued to demonstrate a strong track record of replacing production and adding reserves through the drill bit and via targeted acquisitions. HEI's competitive 2018 drill bit finding and development (F&D) costs of $5.73 per Boe underly its solid reserve replacement record and reflects management's strong operating expertise. HEI’s five-year average all sources F&D cost of $10.32 per Boe reflects its ability to consistently navigate asset acquisitions in a disciplined manner, although the low-cost profile is likely influenced by the relatively low perceived value accorded to its investments in “end-of-life” properties. The proposed acquisition of BP's Alaskan assets will more than double HEI's production in Alaska to around 125,000 Boe per day. The acquired production, which is all oil, is expected to average over 70,000 Boe per day in 2020, while HEI's total pro forma production across its portfolio could increase above 225,000 Boe per day. HEI has previously employed its strategy of acquiring mature, long-lived properties in Alaska's Cook Inlet and North Slope regions, creating value by lowering costs and investing in enhanced well performance. We expect HEI to extend this strategy to the newly acquired North Slope assets as well. High future development costs with sizable asset retirement obligations HEI’s fields are characteristically burdened by higher asset retirement obligations (AROs) because of the typical “end-of-life” nature of its acquisitions. These acquisitions have boosted the future development costs (FDCs) for HEI in growing its production in this manner. At December 31, 2018, future development costs totaled $4,052 million on an undiscounted basis, including roughly $1,247 million of AROs, contrasting somewhat negatively to similarly rated E&P peers. Moreover, while HEI's 28% proved undeveloped (PUD) reserves are a lower component of its total reserves relative to its peers, the company's comparatively low proportion of proved developed producing (PDP) reserves furthers the call on future cash flow to bring its proved non-producing (PNP) reserves into production. With its relatively high future development costs, HEI's leverage is somewhat inflated relative to that of its peers on a debt plus FDC to total PD reserves basis. Helping to offset high future development costs and asset retirement costs, however, is the low F&D cost embedded in these assets, as well as the competitive operating costs HEI evidences on a field level basis. Asset value At June 30, 2019, HEI's proved reserves had a PV-10 valuation of $8.7 billion, which covered its outstanding debt 3.3x. 3 16 December 2019 Hilcorp Energy I, L.P.: Update following ratings being placed under review for downgrade MOODY'S INVESTORS SERVICE CORPORATES Environmental, Social, and Governance Considerations Environmental considerations incorporated into our HEI credit analysis primarily relate to potential carbon dioxide regulations, but also include natural and man-made hazards. Social risks are primarily related to demographic and societal trends and responsible production. These risks could influence regional moves towards less carbon-intensive sources of energy, which could reduce demand for oil and natural gas. Future laws and regulations that could accelerate the pace of energy transition or changes in technology that affect demand for hydrocarbons represent a material and growing risk. The singular control Mr. Jeffery Hildebrand wields over HEI's operations through his ownership of HEI's general partner is also considered in its credit profile; however, the company has prospered under his control and leadership, while maintaining a strong operating profile. Liquidity Analysis As a private company, HEI has assiduously managed its liquidity. We expect the company’s liquidity position to remain good into 2020. At September 30, HEI posted a balance of cash and marketable securities of $241 million, with $631 million available under the $1,700 million committed amount of its $1,900 million secured borrowing base revolving credit facility, which expires in November 2022. The revolving credit facility has a $3,000 million maximum notional amount, indicative of the extent of potential additional liquidity available to the company beyond HEI’s borrowing base. The revolving credit facility has two maintenance covenants: 1) maximum total debt-to-EBITDA of 4.0x and 2) minimum current ratio of 1.0x. The company was in compliance with these covenants at September 30, 2019. Structural Considerations The debt component of HEI’s capital structure consists of three tranches of senior unsecured notes totaling $1,600 million, with the first maturity of $500 million due in December 2024. The Ba2 rating on HEI’s senior unsecured notes reflects their subordinate position to HEI's $1,700 million secured revolving credit's priority claim to the company's assets. The size of the senior secured claims relative to HEI's outstanding senior unsecured notes results in the notes being rated one notch below the Ba1 CFR. Methodology and Scorecard Under Moody’s Independent Exploration and Production Industry rating methodology, HEI maps to a Baa2 scorecard-indicated outcome over the next 12 to 18 months. The assigned Ba1 CFR reflects the company’s relatively smaller size and scale relative to its Ba1 rated E&P peers, tempered by the presumed leveraging impact of its pending acquisition of BP’s Alaskan assets. 4 16 December 2019 Hilcorp Energy I, L.P.: Update following ratings being placed under review for downgrade CORPORATES MOODY'S INVESTORS SERVICE Exhibit 1 Rating Methodology - Independent Exploration and Production Industry Rating Factors Hilcorp Energy I, L.P. Energy, Oil & Gas - Independent E & P Industry Scorecard [1][2] Current LTM 6/30/2019 Measure a) Average Daily Production (Mboe/d) 114 b) Proved Developed Reserves (MMboe) Factor 1 : Scale (20%) Score Moody's 12-18 Month Forward View [3] Measure Score Ba 225 - 250 Baa 419 Baa 1000 - 1100 Baa Ba Ba Ba Ba 4.4x Aa 3x - 4x Aa $16,305.3 Baa $20000 - $23000 Ba $4.5 Baa $4.8 - $5.2 Baa 32.7% Baa 20% - 35% Ba 9.1x Ba 4.5x - 6.5x B Baa Baa Baa Baa Factor 2 : Business Profile (10%) a) Business Profile Factor 3 : Profitability and Efficiency (25%) a) Leveraged Full-Cycle Ratio Factor 4 : Leverage and Coverage (30%) a) E&P Debt / Average Daily Production b) E&P Debt / PD Reserves boe c) RCF / Debt d) EBITDA / Interest Expense Factor 5 : Financial Policy (15%) a) Financial Policy Rating: a) Indicated Outcome from Scorecard Baa1 b) Actual Rating Assigned Baa2 Ba1 [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. [2] As of 6/30/2019(L); Source: Moody's Financial Metrics™ [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures Note: The forward view for the next 12 to 18 months entails Moody's estimates and assumptions incorporating the transactions relating to the consolidation of Hilcorp Energy Development, LP and the pending acquisition of BP p.l.c.'s midstream and upstream assets in Alaska. Source: Moody's Financial Metrics Ratings Exhibit 2 Category HILCORP ENERGY I, L.P. Outlook Corporate Family Rating Senior Unsecured Moody's Rating Rating(s) Under Review Ba11 Ba2/LGD51 [1] Placed under review for possible downgrade on August 28 2019 Source: Moody's Investors Service 5 16 December 2019 Hilcorp Energy I, L.P.: Update following ratings being placed under review for downgrade CORPORATES MOODY'S INVESTORS SERVICE © 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY’S PUBLICATIONS MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. 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REPORT NUMBER 6 16 December 2019 1205877 Hilcorp Energy I, L.P.: Update following ratings being placed under review for downgrade CORPORATES MOODY'S INVESTORS SERVICE Contacts Stephen Lee Associate Analyst stephen.lee@moodys.com 7 16 December 2019 CLIENT SERVICES +1.212.553.4757 Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 Hilcorp Energy I, L.P.: Update following ratings being placed under review for downgrade