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Rating Action:

MOODY'S PLACES SNYDER OIL AND SANTA FE ENERGY RATINGS UNDER REVIEW FOR UPGRADE

14 Jan 1999
MOODY'S PLACES SNYDER OIL AND SANTA FE ENERGY RATINGS UNDER REVIEW FOR UPGRADE Moody's Investor's Service placed Snyder Oil Corporation's debt ratings (currently Ba3 senior implied) under review for upgrade and Santa Fe Energy Resources, Inc.'s ratings (currently Ba2 senior implied) under review for possible upgrade. These actions follow their announced proposal to merge in a stock-for-stock transaction, forming Santa Fe Snyder Corporation. Under the proposed exchange ratio of 2.05 Sante Fe shares for 1 Snyder share, Santa Fe shareholders would hold 60% and Snyder shareholders would hold 40% of the merged entity after consummation of the merger. Pro-forma reserves of 310 million barrels of oil equivalent would consist of 60% liquids and 40% natural gas, 65% of which is located domestically and 35% domestically.



One of the strategic reasons articulated by Santa Fe Snyder for the merger is the opportunity to forge a stronger platform for opportunistic acquisitions that could arise from the sustained impact of weak oil and gas prices on other independent exploration and production companies. Moody's review will include assessment of financing flexibility needed to support Santa Fe Snyder's likely acquisition, capex, and financing strategies. Each firm has been acquisition-minded, though Santa Fe's international opportunities and associated front-ended exploration and development capex was quickly consuming its bank revolver availability during the 1998 weak price environment.



Moody's believes the merger would combine two firm's that each currently possesses significant incremental debt capacity, sound track records of reserve replacement at attractive unit finding and development costs, and sufficiently strong unit operating economics, even under current weak prices, to generate cash flows sufficient to internally fund capex needed to maintain current production levels. The merged reserve base may provide greater financing efficiencies in the bank market, an attractive mix of high impact and low risk prospects, good diversification of production risk, and more balance between international versus domestic and gas versus oil exposures.



Debt coverages measured during the current price trough are sound. Calculated on annualized combined 4Q98 EBITDA and annualized run-rate cash interest expense, Moody's estimates annualized run-rate EBITDAX/Cash Interest Expense of 4.6x. Moody's estimates Total Debt/EBITDAX of 2.8x, calculated on annualized estimated 4Q98 EBITDAX and annualized run-rate cash interest expense of $42 million.



Santa Fe Snyder announced $250 million to $275 million of 1999 capex, excluding acquisitions, that would modestly exceed their expectations of 1999 cash flow but would exceed annualized estimated 4Q98 trough cash flow by as much as $100 million to $125 million. Though pro-forma 1998 EBITDAX approximated $225 million to $230 million, annualized 4Q98 combined EBITDAX approximates $192 million and combined run-rate interest expense approximates $42 million per year on $546 million of debt.



Santa Fe Snyder believes the merged entity would hold 310mmboe of reserves. Moody's estimates that 25% of reserves would be proven undeveloped. At indicated 1998 exit rates for production, this indicates a reserve life of 6 years on proven developed reserves and 8 years on total proven reserves. On the companies' announced 1999 production goal of 40.15mmboe, the reserve life on 12/31/98 reserves would be 5.8 years on proven developed reserves and 7.7 years on total proven reserves. Indicated 12/31/98 Total Debt/Total Proven reserves would be $2.35/boe and Total Debt/Proven Developed reserves would be $1.76/boe. Indicated Total Debt/Total Capital would be somewhat under 50%.



Debt securities affected include Snyder's $175 million of 8.75% senior subordinated notes due 2007, currently rated B2, and Santa Fe's $100 million of 11% senior subordinated notes due 2004, currently rated B1. Snyder's $500 million unsecured bank revolver ($150 million borrowing base) maturing 12/31/2000 is currently rated Ba3 and Sante Fe's $335 million unsecured bank revolver maturing 2003 is not rated but exhibits a current indicative rating of Ba2. Moody's anticipates that the two revolvers will be canceled and replaced by one senior unsecured revolver.



Santa Fe Resources, Inc. is headquartered in Houston, Texas and Snyder Oil Corporation is headquartered in Fort Worth, Texas.

No Related Data.
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