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Global Credit Research - 09 Aug 2010
Approximately $200 million of debt securities affected
New York, August 09, 2010 -- Moody's Investors Service assigned first time ratings to RAAM Global
Energy Company (RAAM) in conjunction with its senior unsecured notes offering.
The assigned ratings are a Caa1 Corporate Family Rating (CFR), a
Caa2 (LGD 4, 64%) rating to the senior unsecured notes,
and a Caa1 Probability of Default Rating (PDR). The outlook is
The proceeds from the new notes offering will be used to repay borrowings
under its existing revolving credit facility and to partially fund development
and drilling activities.
"The Caa1 reflects RAAM's small scale, high concentration
risk, and capital intensity of its property portfolio combined with
significantly higher leverage ," said Ken Austin, Moody's
Vice President and Senior Credit Officer. "The rating also
considers the company's aggressive capital spending plan that is
focused on complex geology, part of which his being funded with
unsecured, term debt."
Although RAAM has been able to grow its reserves and annual production
over the past several years, the company's scale remains comparatively
small to the rated E&P peer group. Along with this smaller
scale is a high degree of concentration risk, with a focus in areas
that Moody's views as having fairly complex geology which requires
significant capital investments. This type of property profile
leads to higher production volatility and any variance in performance
from any of the company's larger wells would have a significant
impact on total results.
In addition, the company's planned capital spending program
contains a large exploration focus, targeting large and in some
cases, very costly prospects. Moody's views the risk
profile of this type of program as being disproportionate with the higher
pro forma debt, particularly given the small scale of the base production.
The company plans on using a portion of the notes offering to fund an
aggressive drilling program, which Moody's considers to have
significant concentration and execution risk. Although management
has indicated that it will take measured approach to this program,
the risk to bondholders is still high given the relatively small base
production that would go to support the debt.
Leverage on the proven developed (PD) reserves (based on 2009 year-end
reserves and debt) was $11.14/boe. However,
the company is increasing debt by nearly 80%, pushing pro
forma debt/PD reserves to approximately $19.00/boe.
This level of leverage is on the high end for the peer group, and
is even higher when factoring in that 40% of the PD reserves are
not producing and would require additional capital to get them to the
RAAM's pro forma leverage on production of approximately $20,000/boe
(based on Q2'10 production) is nearly doubling from year-end
2009 levels, but still compares favorably to the Caa peer group.
However, this metric benefits from the flush production of the Gulf
of Mexico wells which possess high capital intensity as evidenced by the
company's PD reserve life of only 2.7 years, and a
PDP reserve life of only 1.5 years. This production profile
requires significant capital and contains execution risk to generate positive
sequential quarterly production trends.
The Caa1 also considers the company's track record in establishing
production in some very complicated areas of the Gulf of Mexico as well
as its liquidity position, which provides some support for its aggressive
drilling program. The company has been successful in growing reserves
and production over the past three years.
RAAM's liquidity position is currently adequate to cover most of
its cash needs over the next twelve months. Pro forma for the notes
offering, the company will have approximately $140 million
of cash on hand, along with an amended senior secured revolving
credit facility with an expected borrowing base of $62.5
million that will be undrawn at close.
This is a first time rating for RAAM Global Energy Company.
The principal methodology used in rating RAAM was the Global Exploration
and Production (E&P) rating methodology, published in December
2008 and is available on www.moodys.com in the Rating Methodologies
sub-directory under the Research and Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating RAAM can also be found in the Rating Methodologies directory
sub-directory on Moody's website.
RAAM Global Energy Company is headquartered in Lexington, Kentucky.
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns RAAM Global Energy a Caa1 CFR
250 Greenwich Street
New York, NY 10007
No Related Data.
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