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Global Credit Research - 01 Oct 2010
Approximately $300 million of debt securities affected
New York, October 01, 2010 -- Moody's Investors Service assigned first time ratings to Alta Mesa Holdings,
LP (Alta Mesa) in conjunction with its $300 million senior unsecured
note offering. The assigned ratings are a B2 Corporate Family Rating
(CFR), a B3 (LGD4, 69%) rating to the senior unsecured
notes, and a B2 Probability of Default Rating (PDR). The
outlook is stable.
..Issuer: ALTA MESA HOLDINGS, LP
....Probability of Default Rating, Assigned
....Corporate Family Rating, Assigned
....Senior Unsecured Regular Bond/Debenture,
Assigned 69 - LGD4 to B3
"The B2 CFR reflects Alta Mesa's small scale, its limited
partnership structure, its diverse portfolio of properties located
in Texas, Louisiana, and Oklahoma, and its historically
attractive finding and development costs " said Stuart Miller, Moody's
Vice President. "The rating also considers the partnership's inventory
of relatively low risk development opportunities and its stated intention
to fund its capital program with internally generated cash flow."
Alta Mesa was founded in 1987 but was transformed when Denham Capital
Management LP (Denham) became a limited partner investor in 2006 providing
a source of equity capital to fuel the partnership's growth.
Since 2006, Alta Mesa has successfully employed an acquire and exploit
strategy realizing a 39% CAGR of its proved reserves. The
partnership's most recent acquisition, the purchase of The
Meridian Resources Corporation (TMR), closed in May 2010.
The cash portion of the $163 million acquisition was financed with
a combination of revolver borrowings and $50 million of new equity
invested in Alta Mesa by Denham. TMR's assets are complementary
to the legacy assets of Alta Mesa, and the cost of $13.00
per BOE of proved reserves represents an attractive multiple.
The proceeds from the new senior unsecured note offering will be used
to repay borrowings under the partnership's senior secured revolving
credit facility and to pay a $50 million special dividend to Denham,
essentially reversing its recent equity investment. As a result,
the TMR acquisition was effectively 100% debt financed.
Pro forma for the TMR acquisition and the application of the new note
offering, Alta Mesa will have debt to proved developed reserves
of $11.83 per BOE and debt to average daily production of
$31,100, both of which map to a high Caa rating level.
With pro forma average daily production of 12,100 BOE per day,
Alta Mesa's scale also maps to a Caa level.
However, the B2 CFR for Alta Mesa takes into account mitigating
factors including relatively low three year finding and development costs
(all sources) of $11.56 per BOE, a diversified portfolio
of properties with significant production history, and a conservative
management approach towards risk taking. Alta Mesa's three
year finding cost maps to an "A" rating level according to
Moody's E&P rating methodology. Drivers behind the partnership's
relatively low finding cost are (1) the successful application of new
technology to older, producing fields in East Texas and South Louisiana,
and (2) the drilling of wells in areas where the potential exists for
multiple pay zones, or multiple opportunities to complete a commercial
well. In one of its riskier plays, the Deep Bossier in East
Texas, Alta Mesa owns a 25% to 33% non-operated
working interest, a level of exposure that is prudent given the
partnership's limited scale. To mitigate commodity price
risk, the partnership has used hedges to lock in the price for approximately
90% of its 2011 PDP production, and approximately 50%
for 2012, 2013, and 2014. All of these factors position
Alta Mesa for continuing reserve growth without an increase in leverage.
In January 2012, Denham has the right to call for a liquidity event
which could force a sale of Denham's partnership shares, or
a sale of all of the partnership's assets. The uncertainty
that is created by this right, and the potential for a recapitalization
or sale of the partnership is a factor in the assigned ratings.
Alta Mesa's liquidity after the note offering is projected to be
$188 million. The partnership will have a $220 million
borrowing base under its senior secured revolving credit with $56
million borrowed, and approximately $24 million of cash on
hand. With management's stated intent to fund its budget
using internally generated cash flow, the partnership appears to
have adequate liquidity to continue the development of its non-producing
reserves and to fund its modest exploration program.
Due to the scale of Alta Mesa, a positive rating action is unlikely
in the immediate future. A negative rating action could occur if
the partnership's three year finding and development cost rises
above $13 per BOE as this is a key factor offsetting the limited
scale of the partnership. Additionally any property acquisitions
that are financed primarily with debt or any liquidity event that increases
leverage would likely lead to a negative rating action.
The principal methodology used in rating Alta Mesa Holdings, L.P.
was Independent Exploration and Production (E&P) Industry rating methodology
published in December 2008. Other methodologies and factors that
may have been considered in the process of rating this issuer can also
be found on Moody's website.
This is a first time rating for Alta Mesa Holdings, LP.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service's information, confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
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.
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 assigns a B3 senior unsecured rating to first time issuer Alta Mesa Holdings, LP
250 Greenwich Street
New York, NY 10007
No Related Data.
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