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Rating Action:

MOODY'S UPGRADES TO Ba1 SANTA FE SNYDER'S SENIOR UNSECURED RATING; ASSIGNS Ba1 TO PROPOSED NOTES

04 Jun 1999
MOODY'S UPGRADES TO Ba1 SANTA FE SNYDER'S SENIOR UNSECURED RATING; ASSIGNS Ba1 TO PROPOSED NOTES Moody's Investor's Service assigned a Ba1 rating to Santa Fe Snyder Corporation's (SFSC) proposed $100 million of senior unsecured notes, with a maturity expected in the range of five to ten years. Moody's also upgraded to Ba3 from B2 the former Snyder Oil's $175 million of 8.75% senior subordinated notes due 2007, and to Ba3 from B1 the former Santa Fe Energy Resource's $100 million of 11% senior subordinated notes due 2004. Moody's also assigned a Ba1 to SFSC's $500 million unsecured bank revolver, consisting of a $150 million 364-day tranche and a $350 million five-year tranche. The $100 million of 11% notes will be retired with note proceeds. Approximately $350 million of revolver debt will remain outstanding. The senior implied rating is Ba1 with stable outlook.

The ratings accommodate flexibility Moody's believes SFSC will require as a merged management team simultaneously conducts/funds substantial domestic and international reserve development capex programs, formulates and executes post-merger growth strategies, and funds a large international expansion relative to the size of its core North American reserves. The ratings reflect the firm's larger, more balanced and diversified reserve base; favorable more balanced production history and outlook; demonstrated ability to grow domestically and internationally through the drillbit; reasonably competitive full-cycle unit economics of production and reserve replacement; the former Santa Fe's long history of conservative reserve bookings; and Snyder's relatively favorable recent three-year reserve revision record. Production costs are not low, partially due to an oil-weighting and secondary (waterflood and CO2) recovery in the Permian Basin. But all-sources finding and development costs (F&D) have been competitive, yielding competitive full-cycle results.

Moody's expects leverage to rise until at least the fourth quarter of 1999. But leverage is acceptable for the rating and the rating also accommodates a reserve life of only moderate length, future funding needs for sizable development capex for non-producing reserves, international expansion, and potential acquisitions. To its Permian Basin and Rocky Mountain core long-lived reserves, SFSC's international discoveries add visible sustainable production gains, though after considerable forthcoming capex and more complex scope of land and offshore operations in most (Indonesia, Gabon, Brazil, and China) of its international areas.

Thus, the ratings reflect the interrelated funding appetites of (1) a reserve life of moderate length on total reserves, and moderately short length on proven developed producing (PDP) reserves and (2) the development capex and expansion initiatives noted above. On annualized 1Q99 production and total proven 12/31/98 reserves, the overall reserve life is a moderately short 5.6 years on PDP reserves and 6 years on proven developed (PD) reserves, and a moderate 8.3 years on total reserves. Reflecting SFSC's own desire to optimize flexibility and reduce international risk, it is also evaluating a range of international project financing alternatives.

SFSC's core long-lived Permian Basin and Rocky Mountain reserves support an international build-up while the short-lived Gulf of Mexico (GOM) properties are not as leveragable and, if SFSC remains committed to the GOM, may consume the bulk of GOM cash flow for replacement of fast GOM declines. The Rocky Mountain properties have also enjoyed much improved price fundamentals due to the substantial 1998/99 narrowing of the basis differential between the Rocky Mountain and Henry Hub. GOM reserves represent 13% of reserves and 30% of production, exposing that proportion of production and cash flow to a very short reserve life of 3.6 years on total GOM reserves and materially less on PD GOM reserves.

SFSC has 315 million barrels of oil-equivalent reserves consist of 60% liquids and 40% natural gas, 64% of which is located domestically and 36% internationally. Proven undeveloped (PUD) reserves are a material 27% of total reserves, proven developed non-producing (PDNP) reserves are 6% of reserves, and PDP reserves are 67% of reserves.

Relative to the scale of SFSC's Rocky Mountain and Permian Basin legacy properties, the ratings reflect funding and operational challenges during the international build-up which, though prospective and adding diversification, increases exposure to field development delay and cost risks, stretches the time between first outlays and initial production, incurs a range of political risks during the development and production phases of international projects, and, over the near-term, may reduce SFSC's capacity at a given debt rating to fund growth.

While debt leverage on reserves is material but still moderate ($1.98/boe on total reserves and $2.71/boe on PD reserves), growth and/or de-leveraging may be hampered, absent sustained price strength, by the sizable $400 million of future development capex for its PUD reserves and, secondarily, PDNP reserves, especially when coupled with the capex implications of a moderate reserve life and front-end costs of international expansion. The $400 million in eventual PUD/PDNP capex is a claim on cash flow to bring existing reserves to production, and can be added to balance sheet debt of $625 million and about $50 million in present value of off-balance sheet obligations to better assess the burden on existing reserves.

Other leverage measures are moderate, including annualized 1Q99 Debt/EBITDAX of 3.2x (on $625 million of debt in late May 1999), pro-forma EBITDAX/Interest expense of 4.1x, and reserve life-adjusted Debt/EBITDAX of 0.4x. An impending SFAS 121 writedown of $150 million to $200 million will push Debt/Capital towards 51%.

At trough 1Q99 prices, SFSC would still be capable of internally funding about 75% of its three-year average pattern of all-sources reserve replacement capex ($5.15/boe or $200 million). Realized price relief of only $1.30/boe to $1.50/boe over 1Q99 prices was needed to bring SFSC's full-cycle economics into equilibrium, and price rises beyond that level would, assuming constant costs, generate internal funding of growth capex.

Key unit costs, before merger synergies, are $4.50/boe of lifting costs, $1.00/boe of G&A costs, a pro-forma $1.31/boe of cash interest expense, and about $5.15/boe of three year-average all-sources finding and development (F&D) costs. Full-cycle costs thus approximate a considerable $12/boe, requiring average realized prices in that range to sustain full internal funding of reserve replacement. The firm's drillbit F&D costs, before reserve revisions, were $6.18/boe in 1998 and an average of $7.11/boe in the three-years ending 12/31/98. After positive reserve revisions, drillbit F&D costs were $6.13/boe in 1998 and a more attractive $5.53/boe average in the three years ending 12/31/98.

SFSC's $4.50/boe of lifting costs include Permian Basin secondary recovery costs which offset low GOM lifting costs, and would rise materially if short-lived GOM production was not consistently replaced or was divested. And Moody's believes all-sources unit finding and development costs may have an upward bias due to the front-end costs of building multiple new international core areas and the large impending PUD and PDNP capex requirements currently equating to $4/boe on already found reserves.

After a combined $557 million of 1998 capex, Moody's anticipates approximately $250 million of 1999 capex (excluding acquisitions) and exploration outlays. Such outlays would exceed expected 1999 cash flow by $50 million, assuming 2H99 cash flow exceeds 1H99 cash flow after a planned 2H99 ramp-up in the production. Such capex would exceed annualized depressed 1Q99 cash flow by slightly over $100 million. The $250 million includes a major 4Q99 reduction in 1999 capex and includes $170 million of development capex. While essential to bring PUD/PDNP reserves to production, the multi-year $400 million bulge of un-funded PDNP/PUD capex constrains SFSC's capacity to grow, delever, and/or absorb price weakness without incurring debt at a faster pace than reserves would be growing.

The ratings also accord a degree of debt-funded strategic activity. Strategic flexibility, as well as ample liquidity, resides in SFSC's pro-forma $250 million of undrawn revolver availability. The rating accords a degree of latitude in the use and timing of equity related to acquisition activity. One of the strategic reasons stated by SFSC for the merger is the opportunity to forge a stronger platform for acquisitions that may arise from divestitures linked to major oil company mergers or from the impact of sustained weak prices on independent exploration and production companies. Each firm had been acquisition-minded and old Santa Fe's international effort was consuming revolver capacity in the weak price environment.

Santa Fe Snyder Corporation is headquartered in Houston, Texas.

No Related Data.
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