Maybe if these rating agencies had been as diligent in reviewing collaterilized mortgage debt, CLL wouldn't be in these straits now.

Moody's cuts Connacher Oil & Gas to B2
Fri Dec 19, 2008 10:02pm GMT

Dec 19 - Moody's Investors Service downgraded Connacher Oil & Gas Limited's(Connacher) Corporate Family Rating and Probability of Default Rating from B1 to B2 and its US$600 million senior second lien note rating to B2 (LGD 4, 53%) from B1 (LGD 4, 55%). The notes mature in 2015. Moody's does not rate Connacher's C$150 million and US$50 million first secured bank revolvers. While Moody's affirmed Connacher's SGL-3 speculative grade liquidity rating, it will be closely monitored. The first test would be to confirm that year-end 2008 cash balances match forecasts. Thereafter it will be monitored for trends inbitumen prices. The rating outlook is negative.

In light of expected continued very weak bitumen prices, the downgrade reflects the reduced economic viability of Connacher's Great Divide steam assisted gravity drainage (SAGD) oil sands project, reduced cash flow cover of Connacher's debt structure, a negative outlook for refining margins for its Montana refinery, and our view that Connacher may need to renegotiate a covenant next year on its currently undrawn revolvers in order to begin using it for back-up liquidity. Connacher does have approximately $6 million in letters of credit issued under its revolvers.

In combination, several factors prompted Connacher to wisely suspend Great Divide Pod Two development and cut current Pod One production by roughly 50%, or as low as Pod One steam injection and production can be reduced without damaging its Pod One reservoir. These factors include very low bitumen prices, higher diluent costs relative to bitumen value, the impact of a relatively high Canadian dollar on costs relative to U.S. dollar driven revenue, the negative global economic outlook, and heavy budgeted Pod Two 2009 capital spending.

Nevertheless, the B2 rating also reflects Connacher's large current cash balances relative to expected 2009 outlays, including interest expense, and the possibility that all 2009 outlays may be covered with existing cash. The rating also reflects substantial asset coverage, although the market for oil sands properties is currently depressed due to the uncertain oil price outlook and the difficult time acquirers would have raising acquisition capital in current markets.

The B2 rating further reflects a view that phase one (Pod One) of Connacher's Great Divide project had operationally come on fairly strong during 2008 and was producing near design capacity of 10,000 barrels per day. While operationally intricate and inherently entailing a significant teething period and remedial work on aspects of its steaming, water purification, and production activities, Pod One reached commercial operations impressively close to its target date. Pod One appears to have established that its lease acreage was sufficiently bitumen rich across a sufficiently geologically homogenous areal extent to support commercial SAGD operations under supportive oil market conditions. In Moody's view, this may support the view that Connacher may have alternative sources of capital should the need arise, be that private investment capital or strategic partnership capital.

The SGL-3 speculative grade liquidity rating reflects the possibility that cash balances alone may cover reduced cash outlay over the next four quarters. The SGL-3 does not assume that Connacher can draw under its C$150 million and US$50 million senior secured revolvers since it appears that Connacher may need to renegotiate its covenants in order to borrow under the facilities. Moody's believes that bitumen prices would need to recover in order for Connacher to generate positive 2009 EBITDA. If it appears that bitumen prices will be insufficient to avoid significantly negative EBITDA and/or If Connacher cannot slow its rate of spending sufficiently the liquidity rating would be reduced to SGL-4.

Connacher projects that it will have approximately C$235 million of year-end 2008 cash on hand. Moody's sensitizes that to C$200 million to C$240 million. Connacher currently forecasts approximately C$239 million in 2009 cash outflows after operating expenses, including approximately C$22 million if Pod Two construction is delayed for twelve months, $82 million in gross cash interest expense, and C$135 million in capital spending. The principal remaining variables impacting 2009 liquidity needs are the 2009 market forces that will be at work on Connacher's cash operating margins.

Moody's notes that approximately C$89 million of Connacher's cash balance came from its recent monetization of the C$/US$ currency swap it entered into to hedge its exposure on the US$600 million note issue. Accordingly, Connacher is now unprotected in the event of a sustained strengthening in the U.S dollar relative to the Canadian dollar.

Connacher carries approximately C$722 million in straight debt and C$100.050 million in convertible debt. It generated approximately C$69 million in 2007 EBITDA and an estimated C$90 million in 2008 EBITDA. During the second half of 2008, bitumen production was rising strongly but bitumen pricing was falling, conventional oil and natural gas prices on its conventional production were falling, and refining margins were weakening.

Connacher owns a large base of long-lived bitumen reserves with full commercial production of the first phase (Pod One) supplemented by small but material conventional oil and gas production and refining operations. Connacher's oil sands properties span 98,000 acres 50 miles southwest of Fort McMurray, Alberta. With Pod One in production and Pod Two (Algar) having regulatory approval, Connacher is proceeding to seek Pod Three and Four approvals, a process that may take eighteen months.

Connacher completed Pod One development in August, 2007, commenced steaming from 15 horizontal well pairs in September 2007, reached commercial production in March 2008, and was recently producing 9,870 Bbl/d, comparing favorably to 10,000 Bbl/d of Pod One design capacity. Connacher announced this week that it was suspending Pod Two development and reducing POD One production to approximately 5,000 bpd.

As of June 30, 2008, GLJ viewed Connacher to have sufficient appraisal well count and spacing, well log, coring, and 3-D seismic data to assign best estimates of 110.2 million barrels of proven net bitumen reserves, 371.5 million net barrels of proven and probable bitumen reserves (2P), and 443.8 million net barrels of proven, probable, and possible reserves (3P) based on GLJ's constant price assumption. Connacher identified up to 8 pods of oil sands deposits with potential commercial viability.

Connacher's ratings have been assigned by evaluating factors that Moody's believes are relevant to the company's risk profile, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. These attributes were compared against other issuers both within and outside Connacher's core industry; Connacher's ratings are believed to be comparable to those of other issuers with similar credit risk.

The last rating action was November 12, 2007, when Moody's affirmed Connacher's B1 CFR and PDR ratings, assigned a B1 (LGD4, 55%) senior second lien note rating, and a SGL-3 speculative grade liquidity rating. The rating outlook was stable.

http://uk.reuters.com/article/oilRpt...