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17 Jun 2005
MOODY'S UPGRADES WILLIAMS PRODUCTION RMT'S DEBT RATINGS (CORPORATE FAMILY RATING Ba3); OUTLOOK IS STABLE
Approximately $525 Million of Debt Securities Affected
New York, June 17, 2005 -- Moody's Investors Service raised the long-term debt ratings of
Williams Production RMT Company (RMT). Moody's raised RMT's
Corporate Family Rating (previously called the Senior Implied rating)
to Ba3 from B2, its Senior Secured Bank Credit Facility rating to
Ba3 from B1 and its Senior Unsecured rating to B1 from B3. This
action reflects the ongoing progress that The Williams Companies,
Inc. (Williams, Ba3 Corporate Family Rating) has made in
its domestic exploration and production (Williams E&P) business through
RMT, including production and reserves growth, competitive
finding and development (F&D) costs, and improved leverage.
This action concludes the review begun March 24 that reflected improvement
at Williams E&P but needed further analysis of RMT's performance
specifically. The outlook is stable.
Reserves and Production Characteristics -- RMT grew total proved
reserves 17% to 355 million boe (MMboe) during 2004 while total
proved developed (PD) reserves increased 29% to 138 MMboe,
both as a result of an active development drilling program. Total
production increased by 13% in 2004 over 2003 driven by a 31%
increase in production from the Piceance Basin. RMT's production
is expected to increase another 18% in 2005, with a 34%
increase in Piceance production offsetting declining Powder River Basin
production. While RMT's reserves and production volumes are
consistent with a Ba3 rating, we note that RMT has a significant
amount of proved undeveloped (PUD) reserves, with PD reserves representing
only 39% of total proved reserves. RMT would need to grow
its PD reserves volumes closer to 200 MMboe for continued improvement
in the rating. RMT's reserves should grow from already approved
10-acre spacing in much of its Piceance holdings, adding
another 1.4 billion cubic feet (Bcf) per well of recoverable gas.
However, this level of infill drilling is indicative of the degree
of reservoir heterogeneity and the need for more wellbores. We
also note the technology required to recover these reserves, including
directional and horizontal drilling as well as more complex completion
techniques, all of which serves to heighten concerns over ultimate
recovery. Another restraint to RMT's rating is the high degree
of concentration in two basins with about three-fourths of reserves
and production in the Piceance.
Re-investment Risk -- RMT has had strong organic reserves
replacement at F&D costs competitive with higher rated peers.
RMT replaced 354% of its 2004 production, following 237%
replacement in 2003, and its three-year all-sources
replacement was 243%. RMT is currently drilling with 13
rigs in the Piceance and, with its large drilling inventory,
we would expect continued strong reserves replacement. Importantly,
RMT has maintained peer group leading F&D costs, with a three-year
all-sources F&D of $4.89 per boe. The
company's leading edge 2004 drillbit F&D was $4.95
per boe. Going forward, we expect RMT's F&D costs
to rise as a result of increasing drilling dayrates and higher oilfield
services costs. In addition, we note that much of RMT's
reserves additions in the past three years, which contributed to
the strong reserves replacement rate and lower F&D costs, were
in the PUD category. This means RMT will need to spend additional
capital dollars to convert these reserves to PD without any change in
total proved reserves, leading to higher F&D costs. RMT
has contracted with drilling contractor Helmerich & Payne for ten
new rigs for a term of three years. These rigs are expected to
begin coming on line at the rate of about one per month starting in November
2005. Higher drilling activity will result in RMT drilling 450
Piceance wells in 2006, up from its earlier plan of 325 wells,
with 2007 drilling up to 500 wells from an original 350. Increased
drilling should lead to greater development of PUD reserves and higher
production, but we note the material increase in capital spending
required for this program. RMT will need to maintain capital discipline
and F&D costs consistent with its higher rated Ba peers before consideration
of a further rating increase.
Operating and Capital Efficiency -- RMT's full-cycle
costs, including cash costs and three-year F&D,
were $15.87 per boe in 2004, down from $28.86
in 2003, which had reflected significantly higher interest expense.
RMT's cash margin improved to $15.09 in 2004,
reflecting higher realized prices per boe as lower priced natural gas
hedges rolled off and dramatically lower interest expense as higher priced
debt incurred in Williams' 2002 restructuring was repaid.
RMT's cash margin should continue to benefit from the current high
commodity price environment, although we note the company will need
to continue managing its cost structure as well. The combination
of stronger cash margins with the lower F&D described above led to
a leveraged full-cycle ratio, a measure of cash on cash return,
of 3.1x in 2004. This is currently higher than most Ba3
rated peers and will need to be maintained at around 3x for consideration
of a higher rating.
Leverage and Cash Flow Coverage -- RMT's leverage, as
measured by debt to PD reserves, dropped from $6.09
per PD boe at the end of 2003 to $3.79 at year end 2004.
Williams tendered for the senior unsecured notes at RMT in 2004,
reducing total debt from $650 million to $524 million.
Debt plus future development capital to total proved reserves did not
improve as much, dropping from $5.71 to $5.47
per proved boe, reflecting higher expected development costs.
While Williams has not committed to additional debt repayment, prepaying
the RMT term loan is a logical place for Williams to continue its deleveraging.
We would expect RMT's leverage to improve as its PD and total proved
reserves grow, while maintaining or reducing debt levels.
Rating Notching -- The senior secured term loan is rated the same
as the corporate family rating at Ba3 as it represents the preponderance
of debt in the capital structure. The senior unsecured notes are
rated a notch lower at B1 reflecting the lack of security and the ability
of the banks to receive preferential treatment.
Williams RMT's Ba3 corporate family rating reflects its long-lived
natural gas reserves, growing production rates, consistent
organic reserves replacement at competitive F&D costs and improving
leverage. The rating also considers the company's geographic
concentration, significant proportion of PUD reserves, increasing
development capital spending and complicated corporate structure as part
of Williams E&P.
The stable outlook reflects our expectation of production and reserves,
particularly PD reserves, growth; continued strong reserves
replacement at competitive F&D costs; a leveraged full-cycle
ratio in the 3x range; and improving leverage on a PD and total proved
boe basis. RMT's rating could move up through a combination
of greater PD reserves closer to 200 MMboe, consistently increasing
annual production to around 25 MMboe, and lower leverage,
while maintaining its cost structure and leveraged full-cycle ratio.
Declining production and reserves, materially higher costs,
cash or F&D, leading to a leveraged full-cycle ratio
closer to 2x or higher leverage could lead to a negative outlook.
RMT is an indirect wholly owned subsidiary of Williams that owns and operates
natural gas properties in the Piceance Basin of western Colorado and the
Powder River Basin of northeastern Wyoming. These two basins represented
71% of Williams E&P's year end 2004 total domestic proved
reserves and 72% of Williams E&P's 2004 domestic natural
Ratings affected include those of Williams Production RMT Company.
Williams Production RMT Company, an indirect wholly owned subsidiary
of The Williams Companies, Inc., is an independent
exploration and production company headquartered in Tulsa, Oklahoma.
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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