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Rating Action:

MOODY'S REVIEWS RATINGS OF UNION PACIFIC RESOURCES GROUP, PENNZOIL COMPANY, AND EXCEL PARALUBES FUNDING

24 Jun 1997
MOODY'S REVIEWS RATINGS OF UNION PACIFIC RESOURCES GROUP, PENNZOIL COMPANY, AND EXCEL PARALUBES FUNDING New York, 6/24/1997 -- Moody's Investors Service placed under review for possible downgrade the A3 long-term debt rating and Prime-2 commercial paper ratings of Union Pacific Resources Group Inc. (UPR). Moody's also placed under review Pennzoil Company's Baa3 long-term debt and Prime-3 commercial paper ratings with direction uncertain. The rating reviews are in response to UPR's unsolicited tender offer for Pennzoil Company in a two-part transaction for cash and common equity. The transaction is valued at approximately $6.4 billion, including the debt obligations of Pennzoil to be assumed by UPR. In a related action, Moody's will review with direction uncertain the A3 and Prime-2 ratings of Excel Paralubes Funding Corporation, a funding conduit guaranteed by Excel Paralubes. Excel Paralubes is a lube basestock manufacturing joint venture 50% owned by Pennzoil.
Moody's review of UPR's ratings will focus on the reserve valuations, production and drilling prospects, and the cash flow impact of the merger; the benefits to be gained by combining the two companies' downstream operations; the balance sheet impact of the merger; and the cost reductions that may accrue. UPR plans to issue $2.1 billion of new equity, which will mitigate the leverage in the transaction. It will also assume approximately $2.2 billion of Pennzoil's debt and other obligations. The timing of an earnings recovery and extent of de-leveraging, either from asset sales or operating cash flow, will be important factors in reviewing UPR's ratings. In addition, UPR intends to retain Pennzoil's downstream operations, including the company's premier operations in lube oils and its Jiffy Lube quick oil change franchise. The review will focus on the strategic linkage between the two companies' downstream operations and their earnings and cash flow benefits, as well as on future downstream capital requirements.
Pennzoil's Baa3 long-term and Prime-3 commercial paper ratings are placed under review, direction uncertain, to assess the company's response to the unsolicited bid. If successful as currently configured, UPR's bid would most likely be positive for Pennzoil's debt ratings. While the offer is at about a 41% premium to Pennzoil's stock price, it is subject to the Board of Director's review and a response by July 7, 1997. A negotiated transaction is possible, but Pennzoil has numerous anti-takeover provisions in place. It is not clear how those provisions will be invoked or the potential impact on either transaction if Pennzoil undertakes a leveraged counter-proposal. That scenario, however, would be negative for Pennzoil debt holders.
Moody's rating review of Excel Paralubes' guaranteed A3 long-term and Prime-2 commercial paper ratings with direction uncertain, likewise, will depend on Pennzoil's response to UPR's offer. Excel is a joint-venture 50% owned by Conoco Inc. and 50% indirectly owned by Pennzoil Company through its subsidiary, Atlas Processing Company. Excel's debt ratings depend to a great extent on the project's economics and on certain feedstock and liquidity supports provided by Conoco Inc. and E. I. DuPont de Nemours (unrated/Aa3, respectively). Excel is successfully running following recent start-up, and Pennzoil Company provides no direct post-completion guarantees of Excel's debt. A neutral or favorable outcome for Pennzoil's long-term rating would improve Excel's current debt ratings. However, the offtake obligations, the project's strategic importance to Pennzoil, and the ultimate credit profile of Pennzoil and its Pennzoil Products subsidiary are important to Excel's ratings. Consequently, Excel's ratings could be downgraded in the event of a significant leveraging of Pennzoil Company or a downstream operational restructuring that could change the strategic nature of the lube basestock supply to Pennzoil.
Securities under review includes UPR's debentures, notes, MTN program, commercial paper, and the guaranteed trust originated preferred securities (TOPrS) of UPRG Capital Trust I, II, and III; Pennzoil Company's debentures, notes, and commercial paper; and Excel Paralubes' notes and commercial paper.
Union Pacific Resources Group, Inc., is a large independent exploration and production company headquartered in Fort Worth, Texas. Pennzoil Company, engaged in oil and gas exploration and production, lube oil and quick change lube oil operations, is headquartered in Houston, Texas. Excel Paralubes is located in Lake Charles, Louisiana.

No Related Data.
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