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

(The following statement was released by the rating agency)

Approximately US$600 million of rated debt affected

Feb 18 - Moody's Investors Service downgraded Connacher Oil & Gas Limited's Corporate Family Rating (CFR) to B3 from B2, Probability of Default Rating (PDR) to B3 from B2, and US$600 million of second lien senior secured notes to B3 (LGD 4; 51%) from B2 (LGD 4; 53%).

The note ratings are assigned under Moody's Loss Given Default rating methodology. Moody's does not rate Connacher's C$100,050,000 of senior subordinated unsecured notes.

The rating outlook remains negative. The speculative grade liquidity rating is moved down to SGL-4 from SGL-3. While Connacher currently holds a comparatively large cash balance, capital spending and other cash needs appear likely to consume it over the first three quarters of 2009, unless oil prices rise sufficiently to move margins and cash flow firmly into positive territory. The downgrades principally reflect that

(i) current down-cycle oil prices and resulting weak cash flow would not support project economics and proportionately high debt levels and

(ii) that Connacher has yet to arrange funding to adequately supplement its liquidity in the meantime. Given that world oil demand is still falling and that oil overproduction will continue to overshoot demand of oil until OPEC cuts begin to reduce inventories, it is premature to build an oil market recovery into Connacher's ratings.

The B3 CFR rating is supported by Connacher's approximately C$224 million of year-end 2008 balance sheet cash; proportionally large proven and probable reserve base relative to leverage; good progress in 2008 and first quarter 2009 in ramping up, and then re-ramping up, Phase 1 (Pod One) steam-assisted gravity drainage (SAGD) bitumen production; the achievement to-date of a strong steam-oil ratio; and important improvements in key market determinants of cash flow during first quarter 2009.

The ratings are also supported by substantial asset coverage. After beginning this year with approximately C$224 million in cash, Connacher forecasts approximately C$185 million to C$200 million in 2009 cash outflow including a decline in payables, operating expenses, pending Pod Two construction expenses, $88 million in gross cash interest expense, and C$92 million in capital spending.

Connacher's Great Divide Pod One production came on strong during 2008 and was producing near design capacity of 10,000 barrels per day. It reached commercial operations close to its target date and within 20% of its original budget. However, in December 2008, due to sharply lower oil prices, particularly deep price discounts on heavy oil, and high diluent costs, Connacher cut Pod One steam injection by up to 50% and suspended the Great Divide Pod Two (Algar) development.

These factors have since adjusted sufficiently for Connacher to recommence full steam injection, with production expected to return to prior levels during the next few quarters. In addition, energy costs are now much lower and the steep contango forward curve in the oil market enabled Connacher to favorably hedge 25% of its production.

Connacher's third party engineer estimated that proven reserves grew by over 190% during 2008 to 175.5 million barrels of bitumen. It also estimated 370 million net barrels of proven and probable bitumen reserves and 443 million net barrels of proven, probable, and possible reserves. Pro-forma for the note offering, Connacher would carry approximately C$940 million in straight debt and C$100.050 million in subordinated 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'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 December 19, 2008, when Moody's downgraded Connacher's Corporate Family Rating and Probability of Default Rating from B1 to B2 and its senior second lien note rating to B2 (LGD 4, 53%) from B1 (LGD 4, 55%). Moody's affirmed Connacher's SGL-3 Speculative Grade Liquidity rating .

The rating outlook was negative Connacher Oil and Gas Limited is headquartered in Calgary, Alberta, Canada.