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Rating Action:

Moody's assigns Baa2 (sf) rating to Obsidian Natural Gas Trust loan backed by natural gas volumetric production payments

05 Nov 2010

Approximately $1.15 billion in aggregate loan amount rated.

New York, November 05, 2010 -- Moody's Investors Service has assigned Baa2 (sf) rating to a loan (the Loan) extended to Obsidian Natural Gas Trust (the Trust) as borrower pursuant to a Credit Agreement dated as of September 30, 2010 with Barclays Bank PLC (Barclays)(Aa3) as Administrative Agent. The complete rating action is as follows:

Borrower: Obsidian Natural Gas Trust

Loan: Credit Agreement dated as of September 30, 2010

Aggregate principal loan amount $1,152,449,046, final payment due on or before February 2, 2016, rated Baa2 (sf)

RATING RATIONALE

The Loan is backed primarily by natural gas deliveries under a volumetric production payment (VPP) between Chesapeake Exploration, L. L. C. (CELLC), a wholly-owned subsidiary of Chesapeake Energy Corporation (Chesapeake) (Ba2), as the seller of the VPP, and Obsidian Natural Gas Trust as the buyer of the VPP. VPPs are treated as real property interests under Texas law and are expressly excluded from the seller/debtor's bankruptcy estate subject to certain exceptions.

The natural gas is produced from a group of 1,898 producing natural gas wells located in the Barnett Shale formation in Texas. The VPP has scheduled delivery amounts over a term of five years and the term can be extended if any delivery shortfall occurs. CELLC is obligated to make up any shortfalls in future periods from excess production above the scheduled VPP delivery amounts for those periods. Also, the term of the VPP is automatically extended in case there is any make-up amounts at the end of the five-year term until the make-up amount is fully repaid through future deliveries. However, the Loan has a fixed maturity which is approximately six months after the last scheduled delivery date in August 2015, so such make-up deliveries beyond the final maturity of the Loan were excluded in Moody's analysis. The VPP deliveries to the Trust will be purchased by CELLC at specified delivery points. All the performance obligations of CELLC under the VPP transaction documents will be guaranteed by Chesapeake.

The Barnett Shale is a hydrocarbon producing geological formation consisting of sedimentary rocks in northern Texas. The reserves associated with the wells under the VPP are close to major pipelines for transportation, and are all proved developed producing reserves. The natural wells under the VPP are located in eight counties and are very diversified by well size, with no single well accounting for more than 0.3% of the total reserves. Reserve estimates by DeGolyer and MacNaughton as the Independent Engineer indicate a coverage ratio (production at the P90 level over required deliveries under the VPP) of 1.29x over the life of the VPP.

The Loan has a final maturity date in Feb 2016, which is approximately six months after the last scheduled delivery date under the VPP. The Loan has an expected outstanding balance each month, reflecting expected amortization from proceeds from scheduled VPP deliveries.

The rating is based on the proved developed producing reserves reviewed by the Independent Engineer, the production profile of the wells, the coverage of 1.29x over the life of the VPP, the availability of the transportation pipelines, the natural gas commodity hedge with Barclays, the interest rate hedge (a cap) with Barclays, the performance guarantee provided by Chesapeake to CELLC for its obligations under the VPP transaction documents, and the legal and transaction structure of the transaction including the treatment of VPP under the U.S. bankruptcy code.

Key credit metrics considered by Moody's include the coverage ratio of the VPP production of 1.29x over the life of the VPP and the credit worthiness of the operator/VPP seller of the wells under the VPP.

PRINCIPAL METHODOLOGIES: The principal methodology used in rating the transaction is summarized below. Other methodologies and factors that may have been considered in the process of rating this issue can also be found in the Rating Methodologies sub-directory on Moody's website.

Moody's believes that reserve risk, operator/seller risk and transportation risks are the major risks to this transaction. We utilize a cashflow model to quantitatively assess these risks based on Monte Carlo simulations. The three key factors in the model include three production profiles, operator default and transportation interruptions. The three production profiles represent a haircut of approximately 5%, 12% and 25% of the Independent Engineer's estimate of the production of the wells over the life of the VPP. A probability of 10%, 85% and 5% is assigned to each of the three production scenarios, respectively. Operator default is simulated based on its rating but stressed by one notch down and a loss of delivery of three months is assumed if operator default occurs. Transportation interruption is assumed to occur randomly with a 5% probability and will result in a loss of 5% of the deliveries per occurrence. These stresses and associated probabilities were judgmentally determined based on the characteristics of the natural gas wells and the Independent Engineer's reserve review. We then run the model 10,000 times to determine the average yield on the loan and the average reduction in the yield on the loan is mapped to a Moody's rating.

Moody's also conducts qualitative assessments on the risks in the transaction, including the geological risks of the reserves, the diversity of the wells, and the legal and regulatory risks associated with the VPP transaction.

MOODY'S V-SCORE: The V Score for this transaction is Medium/High. The V Score indicates "Medium/High" uncertainty about critical assumptions such as data quality and disclosure, transaction and analytical complexity as well as market value risk. The Medium/High score for this transaction is largely driven by the quality of historical data for the sector and analytical complexity which are all assessed to be higher than average. There have been very limited number of VPP transactions in the past; therefore, there have been very limited amount of performance data available to date. Analytical complexity is assessed to be above average as a cashflow model specific to this transaction is used based on Monte Carlo simulations.

Moody's V Scores provide a relative assessment of the quality of available credit information and the potential variability around the various inputs to a rating determination. The V Score ranks transactions by the potential for significant rating changes owing to uncertainty around the assumptions due to data quality, historical performance, the level of disclosure, transaction complexity, the modeling and the transaction governance that underlie the ratings. V Scores apply to the entire transaction (rather than individual tranches).

MOODY'S PARAMETER SENSITIVITIES: For this exercise, we analyze stress scenarios assessing the potential model-indicated rating outputs if Chesapeake's rating is changed from Ba2 to B2 or Caa2, and if the monthly well decline rate has been increased. If Chesapeake's rating remains Ba2 and if the monthly well decline rate is increased by 0%, 0.10%, 0.30% and 0.50% per month, respectively, corresponding to a haircut of 12%, 14%, 17% and 20% , respectively, of the Independent Engineer's estimate, then the model indicated rating would be Baa2, Baa2, Ba3, and B3, respectively. If Chesapeake's rating is changed to B2 and if the monthly well decline rate is increased by 0%, 0.10%, 0.30% and 0.50% per month, respectively, corresponding to a haircut of 12%, 14%, 17% and 20% , respectively, of the Independent Engineer's estimate, then the model indicated rating would be Baa2, Baa3, Ba3, and B3, respectively. If Chesapeake's rating is changed to Caa2 and if the monthly well decline rate is increased by 0%, 0.10%, 0.30% and 0.50% per month, respectively, corresponding to a haircut of 12%, 14%, 17% and 20% , respectively, of the Independent Engineer's estimate, then the model indicated rating would be Baa3, Ba1, B1, and B3, respectively.

Parameter Sensitivities are not intended to measure how the rating of the security might migrate over time; rather they are designed to provide a quantitative calculation of how the initial rating might change if key input parameters used in the initial rating process differed. The analysis assumes that the deal has not aged. Parameter Sensitivities only reflect the ratings impact of each scenario from a quantitative/model-indicated standpoint. Qualitative factors are also taken into consideration in the ratings process, so the actual ratings that would be assigned in each case could vary from the information presented in the Parameter Sensitivity analysis.

Moody's Investors Service received or took into account third party due diligence reports including an Independent Engineer's reserve review letter and a title due diligence memorandum provided by the counsel for Barclays.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Additional research including a pre-sale report for the previous transaction is available at www.moodys.com. The special report, "Updated Report on V Scores and Parameter Sensitivities for Structured Finance Securities" is also available at moodys.com. In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Michael McDermitt
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Xiaochao Wang
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's assigns Baa2 (sf) rating to Obsidian Natural Gas Trust loan backed by natural gas volumetric production payments
No Related Data.
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