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Rating Action:

Moody's Assigns B2 Rating to Stallion, Outlook Stable

10 Jan 2007
Moody's Assigns B2 Rating to Stallion, Outlook Stable

Approximately $425 million of debt affected (first-time rating)

New York, January 10, 2007 -- Moody's Investors Service assigned a B2 corporate family rating (CFR) and probability of default rating to Stallion Oilfield Services Ltd. (Stallion). Moody's also assigned a B3, LGD 4 (63%) rating to Stallion's proposed offering of $300 million senior unsecured notes due 2015 and a Ba2, LGD 1 (9%) rating to its $125 million senior secured revolver. The outlook is stable.

Proceeds from the notes will be used to retire a term B loan and revolver borrowings outstanding under the existing senior secured credit facility and to fund acquisitions. Simultaneously with the closing of the notes offering, Stallion will amend and restate the credit facility to increase the senior secured revolver capacity from $70 million to $125 million.

Pete Speer, Moody's Vice-President/Senior Analyst commented, "Stallion's B2 corporate family rating reflects the substantial valuation and performance risks inherent in its rapid acquisition pace during top of the cycle market conditions and resulting high leverage, partially offset by the company's strong niche market position." Including the 4th quarter 2006 acquisitions and $45 million equity contribution, Stallion had total pro forma assets of approximately $450 million at September 30, 2006, compared to much larger and better capitalized oilfield services competitors like National Oilwell Varco, Inc. (rated Baa1) and Superior Energy Services, Inc. (rated Ba3), and national rental equipment companies like the equipment rental operations of Hertz Corporation (rated Ba3). Moody's estimates that the book value of property, plant and equipment is approximately $220 million and tangible net worth will be approximately $40 million, providing limited tangible asset cover for the notes considering the senior secured facilities priority claim. The book value of PP&E reflects recent acquisition valuations and those assets would likely decline in value in the event of a market downturn.

Stallion will have high leverage following the $300 million notes offering on estimated pro forma EBITDA generated in strong market conditions. At September 30, 2006, pro forma Debt/Capitalization was 67% and pro forma Debt/LTM EBITDA was 3.9x. The ratings are also restrained by Stallion's short operating history that makes it difficult to predict how the business will perform in a downturn; its aggressive growth strategy (approximately $207 million in acquisitions in 2006) and the inherent challenges and risks of integrating over ten acquisitions that have more than tripled the company's size within the past twelve months; and the cyclical nature of Stallion's business, which is directly linked to the volatile U.S. onshore drilling cycle.

The ratings are supported by the strength of Stallion's market position in the basins in which it operates, particularly its largest business line, workforce accommodations, where the company believes it currently has a 30% share of the overall onshore drilling market in the United States and is more than twice as large as its nearest competitor. Stallion holds a dominant position in the Gulf Coast and Rocky Mountain workforce accommodations market and is further expanding its position in the Permian basin in a pending acquisition. The company has an experienced management team with a history of successfully closing and integrating acquisitions within the oilfield services sector. Stallion is controlled by funds managed by Riverstone Holdings LLC and The Carlyle Group, private equity firms with extensive energy industry investment experience. Carlyle/Riverstone has designated a portion of their investment funds for additional equity investments in Stallion to fund acquisitions, albeit at Carlyle/Riverstone's discretion.

The stable outlook is supported by Moody's expectation that market conditions will remain supportive but no longer as buoyant as the past two years. The recent decline in natural gas prices may reduce the growth in drilling activity or even result in a moderate decline from recent levels. Moody's also expects Stallion to meet its 2007 projections for earnings and cash flows and continue to make acquisitions to strengthen its market position or add further geographic diversification in the U.S. in its existing service lines and to use meaningful equity funding in large acquisitions.

A positive outlook is possible if Stallion materially increases its scale and strengthens the durability of its business through strategically consistent and reasonably priced acquisitions combined with effective de-leveraging through equity funding that lowers its Debt/EBITDA and Debt/Capitalization below 2.5x and 60% in strong market conditions.

Ratings could be pressured if Stallion were to materially increase its present leverage through debt funded acquisitions, aggressive growth capital expenditures and/or distributions to equity holders. Also, a significant or prolonged deterioration in onshore U.S. drilling activity resulting from lower commodity prices (primarily natural gas) could dramatically decrease EBITDA and cash flows for Stallion. Under that scenario, Stallion could possibly violate senior secured credit facility debt covenants and face other difficulties that could result in a negative outlook or rating downgrade.

Stallion Oilfield Services Ltd., a private company headquartered in Houston, TX, is a provider of wellsite support and construction and logistic services to E&P companies and drillers throughout the United States and offshore Gulf of Mexico.

New York
John Diaz
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Peter Speer
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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