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16 May 2003
CORRECTION TO TEXT: MOODY'S ASSIGNS B2 TO WILLIAMS RMT'S FIRST SECURED TERM LOAN B
Moody’s rated Williams Production RMT Company's (RMT) $400 million senior first secured debt and confirmed its senior unsecured notes. Generally, this reflects: high leverage, and potentially higher leverage, on reserves; small proven developed reserve base; major capital needs to develop proven non-producing reserves; discounted Rocky Mountain natural gas prices; and that all RMT hedges are with Williams' trading subsidiary. This is tempered by a lower risk reserve replacement profile, strong operating management, and its long successful experience with its Rocky Mountain property base. RMT is an operating company indirectly wholly owned by The Williams Companies (B3 senior implied and Caa1 senior unsecured).
With a stable rating outlook, Moody's:
i) Assigned a B2 rating to RMT's proposed $400 million first secured Term Loan B maturing May 2007.
ii) Assigned a B3 senior implied rating to RMT.
iii) Confirmed a Caa1 rating for RMT's $150 million of 7.55% senior unsecured notes.
Ratings restraints: relatively small proven developed producing (PDP) and proven developed (PD) reserves; high leverage on PD and PDP reserves and below average PD reserve life; reliance on the trading subsidiary of highly leveraged Williams for all of RMT's natural gas hedges; concentration of 82% reserves and 57% of production in one geologic setting (Piceance Basin); the heavy $915 million of future capital needed simply to bring RMT's outsized mix of proven undeveloped (PUD) and proven developed non-producing (PDNP) reserves to production; the inherent potential for environmental groups to continue to attempt to slow the pace of Rocky Mountains drilling (in spite of the BLM's recent favorable ruling); and the fact that parent Williams currently carries extremely high leverage and faces numerous challenges to resolve prior to being viewed as additive to RMT's ratings.
The ratings are supported by sound reserve replacement economics (though based on the limited information available to assess RMT's three year average finding and development costs); historically relatively lower reserve replacement risk and adequate natural gas gathering and processing infrastructure; the extensive experience in the region provided by RMT's operating management; firm pipeline transportation to move almost two thirds of RMT's production away from Rocky Mountain pricing, which is historically discounted from the Henry Hub benchmark, to the Mid-continent and San Juan Basin regions (San Juan discount is not as severe as Rocky Mountains); and an extensive inventory of comparatively low risk PUD and probable drilling locations involving multiple pay zones. Firm pipeline transportation will rise towards 90% of production by 2006.
Moody's believes there is a good possibility of material reserve additions from approved down spacing on a portion of RMT's Piceance Basin properties. Moody's cautions that such reserves would entirely be comprised of PUD reserves requiring substantial drilling and development capital.
RMT holds a property base of considerable quality. However, proposed combined debt and necessary development capital represent high leverage on total proven reserves in a region that also has faced periodic regulatory and environmental impediments to achieving the sector's desired pace of drilling and development, and that produces into discounted prices due to chronic oversupply in the region and distance from major natural gas consuming markets. Furthermore, RMT's year-end 2002 PV10 net present value of reserves incorporates historically up-cycle natural gas prices. Moody's also projects that longer-term reserve replacement costs may be in the range of $0.60/mcfe to $0.75/mcfe. Additionally, a bit over one-third of RMT's production is sold directly into discounted Rocky Mountain prices with the remainder escaping that discount by having firm transportation out of the gas-long Rocky Mountain region and into major pipeline transportation hubs.
The B2 Term Loan B rating would be supported by a perfected first mortgage on substantially all of RMT's reserves. The Caa1 rating on the 7.55% senior unsecured notes reflects their material effective subordination to, at least, $400 million of proposed senior secured debt.
In light of the parent's ongoing cash needs, and in order for RMT to be viewed as a standalone exploration and production credit with upward rating momentum, it would be desirable that Term Loan B covenants enable the maximum amount of RMT cash flow to be dedicated to reinvestment in RMT reserve development and replacement and/or debt reduction, rather than be available for dividends. Covenants would need to ensure that ample cash flow be reinvested to (1) develop, complete, and produce existing PDNP and PUD reserves and (2) provide ample internal capital to ensure a reasonable possibility of continuing to replace reserves during the life of Term Loan B.
Regarding RMT's Piceance Basin properties, the firm has been working these properties since its Parachute Creek discovery well in 1984. The Piceance is a 1,700 foot to 2,400 foot thick gas bearing horizon. While the horizon is predominantly characterized by low porosity and low permeability rock, embedded within it are very high numbers of layered tight lenticular sandstone reservoirs. Drilling targets multiple pay sand lenses at roughly 6,000 feet and 7,500 feet. Statistically, completion rates are quite high. The volumetric half-life of RMT's Piceance proven developed producing reserves is roughly 6 years.
Regarding RMT's coalbed methane reserves in the Powder River Basin, these properties are comparatively price and unit cost sensitive. Drilling, development and production have so far been concentrated in the Wyodak coals. Since 2001, RMT's capital and activity has begun to migrate from the Wyodak to the exploitation of the geologically deeper Big George coals, which are now beginning to produce for RMT. The Wyodak is increasing a mature play. In Moody's view, it is too early in the Big George's development to assign significant ratings value to the ultimate scale and economic contribution of the Big George properties. Furthermore, it is Moody's view that the production volumetric half-life of WRMT's existing proven reserves is a low 2.8 years.
Term Loan B's use of proceeds will be to repay a like proportion of RMT's existing $1.016 billion secured term loan. Additional funds from the parent, Williams, will repay the then remaining amount of the existing secured term loan, the $85 million of PIK interest expense, and transaction fees and expenses.
Pro-forma for a $400 million Term Loan B, RMT's capital structure would include the Term Loan B, $150 million of 7.55% senior unsecured notes due 2007, and $13 million of other secured debt which RMT expects to pay off shortly. In addition, a now $52 million preferred interest in a subsidiary is effectively senior unsecured debt structurally senior to Term Loan B. However, RMT believes that the $52 million will be paid off imminently. Lastly, proceeds from pending asset sales are expect to be loaned to the parent Williams which will also be advancing funds to repay part of the existing secured debt.
RMT's pro-forma proven developed (PD) reserves total a comparatively small 112.1 mmboe (672.6 mcfe) of reserves. PUD reserves represent a high 60% to total proven reserves, which total 279.1 mmboe (1.675 bcfe). PD reserves have a below average reserve life of 6.5 years on 2002 pro-forma production.
RMT would carry a substantial debt burden on reserves requiring an additional $915 million of capital, plus attendant drilling, completion, and decline curve risk, to produce. At $400 million of Term Loan B, total leverage on PD reserves is high at $5.02/boe of PD reserves ($3.57/boe of first secured debt only). At a $500 million Term Loan B, total leverage on PD reserves is high at $5.68/boe (a $4.47/boe of first secured debt only).
At $400 million of Term Loan B, total debt plus the required $915 million of development capital would be a high $5.30/boe of total reserves ($4.71/boe including only first secured debt and development capital). At $500 million of Term Loan B, these numbers are high at $5.01/boe and $4.52/boe, respectively.
RMT's ability to realize under its natural gas price hedges with its affiliate are important to generating adequate coverage of and returns on reserve replacement. High benchmark natural gas prices can weaken and Rocky Mountain price realizations can be severely discounted from benchmark prices, though this may be moderating with this month's opening of the Kern River Pipeline expansion. Based on the limited amount of historic financial data available solely for the pro-forma RMT operating entity and for the components of its last three years of reserve replacement cost history relating solely to the pro-forma reserve base, Moody's roughly estimates RMT's total full-cycle costs to be in the $13/boe ($2.17/mcfe) range, including pro-forma unit production, G&A, interest, and finding and development costs. However, this could change with experience.
Williams Production RMT is headquartered in Tulsa, Oklahoma.
No Related Data.
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