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Global Credit Research - 30 Nov 2010
New York, November 30, 2010 -- Moody's Investors Service affirmed Pan American Energy LLC's
(PAE) Ba1 global local currency rating and Pan American Energy LLC,
Argentine Branch's Ba1 global local currency rating, Ba2 foreign
currency bond ratings and Aaa.ar National Scale Rating.
The rating outlook is stable.
The rating action is in response to BP p.l.c.'s
(rated A2, Stable) announcement that is selling its 60% stake
in PAE to Bridas Corporation for approximately US$7.1 billion.
Bridas Corporation, which is a holding company, currently
owns 40% of PAE. Bridas Corporation is 50% owned
by Bridas Energy Holdings Ltd. and 50% by CNOOC International
Ltd. Bridas Energy Holdings Ltd. is an unrated, privately
owned oil and gas company owned by the Bulgheroni family. CNOOC
International Ltd. is a subsidiary of CNOOC Ltd (rated Aa3,
Stable), which is 64% owned by China National Offshore Oil
Corp., and which in turn is wholly-owned by China's
State Council and ultimately the People's Republic of China.
The transaction is expected to be financed with approximately US$2.1
billion in debt (to be issued at the Bridas Corporation level) and US$5
billion in equity. The transaction is subject to regulatory approval
and is expected to close in the first half of 2011.
"PAE's ratings affirmation reflects Moody's expectation
of continued sound operating performance under the company's new
ownership structure," commented Gretchen French, Moody's
Vice President -- Senior Analyst. "While financial leverage,
including the acquisition debt, will increase and PAE's dividend
payout will rise and become less flexible, PAE has the financial
strength to accommodate the additional debt and dividend obligations."
PAE's Ba1 rating had only reflected a modest degree of linkage to
BP's ratings. While Moody's believes that PAE has benefited
from certain operational and technical knowledge as a result of BP's
majority ownership, PAE was financed on a standalone basis and did
not rely on BP for financial support, including during the Argentine
financial crisis. With CNOOC's 50% stake, PAE
will continue to have a strong owner that operates outside of Argentina,
which has the financial capacity to provide additional equity into the
structure. Nevertheless, with the change in ownership,
the future operational and financial strategies of PAE are less certain.
Moreover, PAE's dividend policy will become less flexible
and its dividend burden will increase in order to support the debt obligations
at Bridas Corporation.
With the change in ownership, PAE could experience shifts in strategic
direction and financial policy that could have negative credit implications.
A new CEO and CFO will be appointed as a result of the transaction.
However, most of PAE's managerial and technical staff is expected
to be retained, and Moody's does not expect a material change
in PAE's operating performance as a result of the sale. PAE
has a long track record of growing reserves and production in Argentina
at competitive costs. It is Moody's understanding that PAE
will continue to maintain sufficiently high levels of capital spending
in order to continue growing reserves and production. Over the
near to medium term, both Bridas Corporation and PAE may pursue
upstream opportunities outside of the Southern Cone of Latin America,
as well as downstream opportunities in Argentina.
Consolidated leverage, including the holding company debt at Bridas
Corporation, will increase as a result of the transaction.
However, PAE's Ba1 rating can incorporate some increased leverage,
as its leverage is currently conservative and its overall profile is indicative
of a low investment-grade rated exploration and production company.
On a consolidated basis and excluding PAE's Bolivian assets,
debt/proved developed (PD) reserves will increase from US$2.34/barrel
of oil equivalent (boe) at June 30, 2010 to US$4.91/boe
as a result of the transaction.
PAE's dividends, which have historically been variable,
will become less flexible and will rise in order to service the debt obligations
at Bridas Corporation. As such, PAE's stand-alone
financial leverage will also likely rise somewhat, but is expected
to remain within a range appropriate for the Ba1 rating. Nevertheless,
we note the challenge of maintaining a fixed dividend payout as an exploration
and production company due to the high level of capital intensity required
to maintain even flat production levels. Moody's assumes
that PAE's dividends will remain within a range of US$200
to US$600 million per year, and that dividends may be in
the high end of the range over the near term.
The ratings affirmation and stable outlook assume that PAE will be able
to refinance at reasonable terms any potential change of control obligations
triggered as a result of the change in ownership. Nearly all of
PAE's outstanding notes (US$750 million) and bank loans (US$936
million) have a change of control put option that triggers if BP ceases
to own more than 50% of PAE. Pursuant to the change of control
provisions in the note indentures, bondholders can redeem the notes
at 101% of par value and the redemption right is due 70 days after
the occurrence of the change of control. In PAE's bank debt,
the change of control is also triggered at closing and repayment of 100%
is due within 30 days. PAE expects to put in place a five-year
US$300 million committed unsecured term loan facility to satisfy
potential obligations. In addition, the company will have
access to a separate five-year US$200 million committed
credit facility. Management expects to meet any additional obligations
with US$400 million in excess cash balances and, if needed,
through uncommitted bank lines in Argentina. While PAE does not
have committed financing and cash on the balance sheet to redeem all of
its debt obligations subject to the change in control (approximately US$1.7
billion), we note that several of PAE's current lenders are
expected to participate in its new US$300 million term loan facility.
In addition, with closing of the transaction not expected to occur
until the first half of 2011, PAE has a modest degree of time to
line up additional financing, if necessary. Once the change
of control offer is completed, management plans to refinance any
additional short term borrowings on a long term basis.
Given higher consolidated leverage and the fixed nature of the dividend
payout, future flexibility in PAE's ratings is limited.
If PAE's stand-alone leverage materially increases (above
$4.00 debt/PD reserves) or if consolidated leverage further
rises (above $6.00 debt/PD reserves), the ratings
could be pressured. The ratings could also be pressured as a result
of diminished liquidity. Moody's views PAE's conservative
leverage as necessary for the company to maintain its Ba1 rating due to
the lower value we attribute to its reserve and production profile relative
to its North American peers due to their concentration in an economically
and politically unstable region.
Upward rating momentum is not expected at the present time. PAE's
Ba1 local currency rating is the highest of Moody's rated corporates
in Argentina and is capped by Argentina's Ba1 local currency ceiling.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The principal methodology used in this rating was Independent Exploration
and Production (E&P) Industry rating methodology published in December
Pan American Energy LLC engages in the exploration and production of oil
and gas in the Southern Cone region of South America and is headquartered
in Buenos Aires, Argentina.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms Pan American Energy's ratings
250 Greenwich Street
New York, NY 10007
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