OREANDA-NEWS. S&P Global Ratings today affirmed all its ratings, including the 'BBB+' long-term and 'A-2' short-term corporate credit rating, on Houston-based oil and gas exploration and production (E&P) company EOG Resources Inc. The outlook is stable.

The ratings affirmation follows EOG Resources' announcement that it has agreed to acquire privately-held Yates Petroleum Corp. for $2.45 billion, including the assumption of $114 million of net debt. EOG will fund the purchase with $2.3 billion of equity and $151 million of cash and repayment of net debt. Yates Petroleum is a 93-year old company with 1.6 million net acres in the New Mexico Delaware Basin (186,000 net acres), the New Mexico Northwest Shelf (138,000 net acres), the Wyoming Powder River Basin (200,000 net acres), and other western U. S. Basins (1.1 million acres). The acquisition will add about 5% to EOG's total current production and 2% to its year-end 2015 proved reserve base, and 1,740 "premium" locations to EOG's inventory. EOG defines a premium well as one that generates at least a 30%-after-tax rate of return at an oil price of $40 per barrel. Although the high proportion of equity used to fund the transaction modestly improves EOG's credit measures, the improvement is not enough to change our assessment of the company's financial risk profile.

"The ratings on EOG reflect our view of the company's strong business risk, significant financial risk, and adequate liquidity assessments," said S&P Global Ratings credit analyst Carin Dehne-Kiley.

The stable outlook reflects our view that despite weaker credit measures this year as a result of lower commodity prices, EOG will maintain average FFO/debt above 30% and debt/EBITDA between 2x-3x over the next three years.

We could raise the rating if we expected FFO/debt to average above 45% for a sustained period, which would most likely occur if the company were able to maintain or grow production while keeping capital spending within cash flow, in combination with improving crude oil and natural gas prices.

We could lower the rating if we expected FFO/debt to fall and remain below 30% for a sustained period, which would most likely occur if commodity prices averaged below our current price deck assumptions and the company did not further reduce capital spending.