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Rating Action:

MOODY'S CONFIRMS Aa1 LONG TERM DEBT RATINGS OF SHELL OIL COMPANY; REVIEWS TEJAS GAS CORPORATION AND CORAL ENERGY L.P. FOR POSSIBLE UPGRADE

24 Sep 1997
MOODY'S CONFIRMS Aa1 LONG TERM DEBT RATINGS OF SHELL OIL COMPANY; REVIEWS TEJAS GAS CORPORATION AND CORAL ENERGY L.P. FOR POSSIBLE UPGRADE New York, 09-24-97 -- Moody's Investors Service confirmed Shell Oil Company's Aa1 senior long-term debt, Prime-1 commercial paper rating, and the ratings of certain affiliated entities in response to the company's announcement that it would acquire Tejas Gas Corporation in a transaction valued at approximately $2.4 billion. Concurrently, Moody's placed under review for upgrade Tejas Gas Corporation's securities ratings and Coral Energy L.P.'s A3 counterparty rating. Coral Energy is an energy marketing venture jointly owned 44% by Shell Oil, 44% by Tejas Gas, and 12% by Shell Canada Limited (Aa2).
Shell Oil's $61.50/share offer for Tejas Gas's outstanding common stock and the assumption of approximately $900 million of debt and preferred stock values the acquisition at about $2.4 billion. The acquisition is subject to Tejas shareholder approval and is expected to be completed by year-end 1997. Tejas's assets include 10,500 miles of intrastate natural gas pipelines in Texas, Louisiana and Oklahoma, significant storage and natural gas liquids processing capacity, and Tejas's 44% stake in Coral Energy. The acquisition is a strategic move by Shell to grow and integrate the hard assets in the mid-stream pipeline, natural gas gathering, processing and marketing businesses, as well as to secure supply sources and marketing advantages as convergence proceeds in the gas and electric industries.
Shell Oil has indicated it will finance the transaction with debt, which could include a combination of affiliated borrowings and public market debt. Shell's consolidated debt will considerably increase as a result of the transaction, including high cost debt assumed from the Tejas group. However, Moody's believes Shell's increased leverage remains in an acceptable range for its rating, based on an outlook for strong projected growth in Shell's oil and natural gas production from the offshore Gulf of Mexico, expectations for improved returns as Shell's proceeds with the joint-venturing of its refining and marketing operations, and other plans to grow and add value to its mid-stream and chemical assets.
Moody's also notes, however, that the $2.4 billion purchase price appears aggressive and Shell Oil continues to exhibit a high dividend payout relative to its earnings and capital requirements in the next 3-5 years. Consequently, the maintenance of Shell's Aa1 rating is predicated on timely achievement of production targets, higher capital returns from its downstream refining and marketing, and successful growth of the midstream business and energy marketing initiatives. These will be necessary to continue to support the current dividend payout. Moody's notes that Shell Oil, as a wholly owned subsidiary of the Royal Dutch/Shell Group of companies, does have access to borrowings from parent affiliates and a degree of flexibility in balancing dividends with its ongoing internal capital needs. Shell Oil related ratings that are confirmed include its Aa1 debentures, medium-term notes, shelf, counterparty ratings and Prime-1 commercial paper; Shell Frontier Oil & Gas, Inc.'s "aa2" auction preferred stock; the senior debt of 50% owned Deer Park Refining L.P., rated A1/Prime-1; and the Prime-1 rating of Shell Deer Park Cogeneration Trust.
The review for upgrade of Tejas Gas's various debt and preferred stock ratings will focus on the Shell Oil's announced intention to assume or refinance the obligations, as well as on the operating, cost reduction and marketing benefits gained from the integration of Tejas's assets with its own mid-stream businesses. Tejas Gas and linked ratings under review include Tejas Gas Corporation preferred stock, rated "b2"; Tejas-Acadian Holding Company's Ba2 senior secured bank loan rating; and Transok Inc.'s Ba1 counterparty rating and Ba1 MTN program.
The review to upgrade Coral Energy L.P.'s A3 counterparty rating will focus on changes, if any, in governance, strategy and levels of financial support provided by Shell Oil to the energy marketing venture. Coral is expanding in both natural gas and electricity, and will be a very key asset to Shell's ability to maximize the value of its own rising natural gas production and to provide marketing services to producers and end-users. Shell Oil currently does not guarantee Coral's financial obligations. However, the marketing venture's strategic importance to Shell Oil and Shell's dedicated natural gas production are important factors in Coral's current A3 counterparty rating. Upon consummation of the acquisition, Shell Oil will own a combined 88% stake in Coral.
Shell Oil Company, Tejas Gas Corporation and Coral Energy L.P. are headquartered in Houston, Texas. Shell Oil is a wholly-owned subsidiary of the Royal Dutch/Shell Group of companies, rated Aaa for the guaranteed Euro-MTN program of Shell Finance (Netherlands) B.V.

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