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Announcement:

Moody's: PETRONAS acquisition of Progress Energy will extend reserve life

02 Jul 2012

Vast financial flexibility results in only moderate impact on financial profile

Singapore, July 02, 2012 -- Moody's Investors Service said today that PETRONAS' A1 issuer and senior unsecured ratings are not affected by the company's announcement that it will acquire Progress Energy Resources Corp (unrated) (Progress Energy).

The transaction -- valued at approximately CAD5.5 billion -- will be funded from PETRONAS' internal funds. At 31 March 2012, PETRONAS reported cash of RM142 billion (USD46.3 billion) and fund investments of RM 22.4 billion (USD7.3 billion).

"The successful acquisition of Progress Energy could substantially increase PETRONAS' medium-to-long-term oil & gas resources as well as its reserve life," says Simon Wong, Moody's Vice President and Senior Analyst. "Furthermore, it could strengthen PETRONAS' position as one of the largest exporters of liquefied-natural-gas (LNG) to the Asian markets."

"Despite the large size of the acquisition and subsequent development costs, PETRONAS has significant financial flexibility within its ratings, including low leverage, very strong cash flow generation, and robust liquidity," says Wong. "The acquisition and planned development costs, as well as PETRONAS' planned capital expenditure programme, are well supported within its ratings."

Progress Energy would be PETRONAS' largest acquisition to date.

While crude prices have retreated, Moody's expects the acquisition and Progress Energy's capex programme to be accommodated comfortably within the tolerance levels set for PETRONAS' ratings, namely gross adjusted debt to total capitalization below 35%-40%.

To capitalize on the large differential between export prices and domestic gas prices in North America, PETRONAS and Progress Energy have selected a site in Prince Rupert, British Columbia, for a potential LNG export facility and have been given the exclusive right through agreement with the Prince Rupert Port Authority (PRPA) to conduct further feasibility studies. It is possible that PETRONAS may collaborate with partners in the development of the fields. In Moody's view, considering the number of LNG exporting projects under evaluation in Canada and the US, an early final investment decision will give PETRONAS an edge over its competitors.

Progress Energy is a Calgary, Canada-based energy company focused on the exploration, development and production of oil and natural gas reserves in the provinces of British Columbia and Alberta. Progress Energy holds the largest acreage position in the Montney shale gas play. The company's gross proved and probable reserves of 323 million barrel of oil equivalent (BOE) as at 31 December 2011 comprise mainly natural gas reserves of 1.7 trillion cubic feet (gross basis). Its estimated economic contingent resources were 7.5 trillion cubic feet according to the company's Annual Information Form at 31 December 2011. The average daily production was 46,766 boe/d in Q1 2012.

"Progress Energy requires significant capital to explore and develop its substantial unconventional contingent sources. Development and operating costs are relatively higher due to the depth of Montney's resources, shale thickness, as well as the need to use horizontal drilling technology," adds Wong.

Nevertheless, PETRONAS' significant size and financial flexibility will provide Progress Energy with an advantage over its competitors, which are constrained by low gas prices and cash flow challenges in the North American natural gas market.

On 28 June 2012, PETRONAS and Progress Energy announced that PETRONAS' Canadian subsidiary, PETRONAS Carigali Canada Ltd (PETRONAS Canada), and Progress Energy have entered into an agreement for the purchase by PETRONAS Canada of all Progress Energy's outstanding common shares at a cash price of CAD20.45 per share. In addition, it will pay Progress Energy's outstanding convertible debentures of CAD 473million. The acquisition, which could complete as early as September 2012, is subject to the approval of Progress Energy's shareholders, Competition Act and the Investment Canada Act.

In mid 2011, PETRONAS had already acquired 50% of Progress Energy's working interest in three areas, namely Altares, Lily and Kahta in the North Montney formation. The deal valued at CAD1.07 billion comprised a cash payment of CAD267.5 million and 75 percent of the total consideration in the form of a capital carry whereby PETRONAS will pay 75 percent of Progress Energy's share of future capital expenditures in the North Montney Joint Venture over the next five years to a total of CAD802.5 million.

Simon Wong
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Philipp Lotter
Associate Managing Director
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Moody's: PETRONAS acquisition of Progress Energy will extend reserve life
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