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Rating Action:

MOODY'S PLACES BARRETT RESOURCES DEBT UNDER REVIEW FOR UPGRADE

07 Mar 2001
MOODY'S PLACES BARRETT RESOURCES DEBT UNDER REVIEW FOR UPGRADE

Approximately $150 Million of Debt Securities Affected

New York, March 07, 2001 -- Moody's Investors Service placed Barrett Resources Corporation's Ba1 rated $150 million of 7.55% senior unsecured notes under review for possible upgrade upon Shell Oil Company's (Aa1 senior long term debt rating) announcement today of a formal offer to Barrett's board of directors to acquire all Barrett common equity at a price of $55 per share and assume all of Barrett's debt. The potential $2.2 billion acquisition represents $1.8 billion for Barrett common plus the assumption of about $400 million in debt. The review for upgrade is not triggered by Moody's standalone review of Barrett's 2000 results and outlook.

Shell's offer equates to a historically high $1.60/mcfe ($9.61/boe) for Barrett's year-end 2000 total proven reserves. It is a vote of confidence in North American natural gas price fundamentals, Rocky Mountain natural gas price and prospectivity fundamentals generally, and prospectivity of Barrett's reserve and prospect base in particular. The offer is potentially unfriendly since Shell announced it would commence a tender for all Barrett common equity in the absence of a positive response from Barrett. Barrett responded it would reply to Shell's offer no later than Friday March 9. Shell's offer represents a 20.5% premium over yesterday's closing price. Barrett common previously peaked at $59.81 per share on 12/29/00 and had troughed at just over $16 share late in the first quarter of 1999 at the nadir of the last downcycle and just before oil and natural gas prices began their sustained 1999 and 2000 surge.

Though 2000 production is up 13.3% over 1999, the long lead times on coal bed methane development to full production, coupled with a small amount of asset sales and apparently maturing conventional reserves, resulted in flat to slightly down production since 1Q00. Organic gains in more prolific conventional production from the relatively mature Wind River and Piceance Basins have been harder to sustain. Barrett's growth prospects increasingly center on very promising but comparatively more price and unit cost sensitive major coal bed methane properties in the Powder River Basin, in particular, and in the Raton Basin. Environmental regulations and permitting procedures may slow development of certain of Barrett's Powder River coal bed methane properties.

In recent years, Barrett carried increasingly higher proportions of proven undeveloped (PUD) reserves, rising to 42% of total proven reserves by year-end 2000. Barrett has a modestly sized reserve base of 1.323 tcfe (228.7 mmboe) of total proven reserves, up 21% from 1999, and including 576 bcfe (96 mmboe) of PUD reserves. The run-rate fourth quarter 2000 reserve life on 2000 proven developed reserves was 6.7 years, steady with 1999 levels, and the run-rate fourth quarter 2000 total reserve life was 11.6 years, up from 11.1 years in 4Q99. Reserve volume additions for 2000 appear to be somewhat aided by 20-acre wellbore downspacing approval for Barrett's Piceance Basin properties and by very high year-end natural gas prices.

Moody's estimates Barrett's three-year average reserve replacement costs in the range of $0.83/mcfe ($5/boe) for 2000, versus $1.03/mcfe ($6.15/boe) for 1999. The 2000 and 1999 three year averages reflect large negative 1998 and 1997/98 reserve revisions, respectively, partially reflecting the last price downcycle and Barrett's Gulf of Mexico disappointments. Still, in spite of extraordinary year-end 2000 prices, reserve replacement costs were $0.82/mcfe ($4.92/boe), well above 1999 single year levels of just over $3/boe. Ongoing substantial 2001 development capex for existing PUD reserves, sharply rising drilling and services costs across the sector for 2001, and a high likelihood commerciality of 2001 reserve volumes will be measured at prices significantly under 2000 levels, reserve replacement costs in 2001 could rise materially.

Over the years, Barrett's leverage rose significantly from its traditionally low levels last seen in 1996 to $3/boe of Debt/Proven Developed reserves and Debt/Total Capital of 49% by year-end 2000. Leverage was essentially unchanged in 2000 versus 1999 and both years were down from the 1998 leverage peak on proven developed reserves. Front-end exploration and development costs as well as trading losses caused capex to exceed cash flow, resulting in roughly a $60 million rise in debt during 2000 in spite of exceptionally strong up-cycle natural gas prices. Leverage held roughly steady with 1999 due to growth in proven developed reserves and book equity. Assuming mid-cycle to up-cycle prices, leverage could reduce as higher proportions of the coal bed methane properties attain full production.

In the absence of a Shell acquisition, Barrett's ratings are likely to be confirmed upon completion of Moody's first quarter review of 2000 results and discussions with Barrett, possibly with positive outlook.

Barrett Resources Corporation is headquartered in Denver, Colorado. Barrett's activity is centered in comparatively lower geologic risk Piceance Basin properties, comparatively higher economic risk coal bed methane properties in the Powder River and Raton Basins, and higher geologic risk complex Wind River Basin properties.

New York
Robert N. McCreary
Senior Vice President
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
Andrew Oram
V.P.- Senior Credit Officer
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
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