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Announcement:

Moody's changes Connacher's outlook to stable

Global Credit Research - 21 Dec 2010

Approximately US$787 million of rated debt affected

Toronto, December 21, 2010 -- Moody's Investors Service changed Connacher Oil & Gas Limited's (Connacher) outlook to stable from negative and affirmed its Caa1 Corporate Family Rating (CFR). Moody's also affirmed both the B1 rating on Connacher's US$200 million of first lien notes due July 15, 2014 and the Caa2 rating on the US$587 million of second lien notes due December 2015. Connacher's SGL-3 Speculative Grade Liquidity rating was affirmed.

"Connacher's outlook was changed to stable in recognition of the steady ramp-up of Algar over the past several months," said Terry Marshall, Moody's Senior Vice President. "We expect Connacher to produce both higher and more consistent cash flow in 2011 as Algar continues to advance and Pod 1 stabilizes, enabling the company to produce as much as 14,000 to 15,000 barrels of bitumen per day before royalties in 2011."

Downgrades:

..Issuer: Connacher Oil and Gas Limited

....Senior Secured Regular Bond/Debenture, Downgraded to LGD2, 12% from LGD2, 11%

Upgrades:

..Issuer: Connacher Oil and Gas Limited

....Senior Secured Regular Bond/Debenture, Upgraded to LGD4, 58% from LGD4, 59%

Outlook Actions:

..Issuer: Connacher Oil and Gas Limited

....Outlook, Changed To Stable From Negative

Connacher will have a much lower capital spending program in 2011 with Algar and its associated 13 megawatt cogen facility now complete. The anticipated completion of a utility substation in the first half of 2011 should alleviate some of the power outage issues experienced by Connacher in 2010.

The Caa1 CFR reflects Connacher's very high leverage and debt service cost, small production base, and a liquidity position that is likely to be periodically dependent on external sources absent high bitumen prices. The CFR is supported by Connacher's current bitumen production of about 13,000 to 14,000 bpd, its large proven and probable reserve base, and its 9,500 barrels per day asphalt refinery.

Connacher's SGL-3 Speculative Grade Liquidity rating reflects adequate liquidity over the next twelve to fifteen months. We believe Connacher will need to utilize its revolver from time to over the course of the next 12 months as it funds its capital program and deals with the inherent variability in its bitumen production and in its asphalt refinery. Connacher's US$50 million revolving credit facility (US$45 million available given letter of credit usage) should be adequate for this purpose. Connacher should be in compliance with its financial covenants during this period. The company's assets are pledged under the first lien credit facility and notes, but it does have the ability to sell certain non-core assets, if proceeds are reinvested in the business, as Connacher has indicated it intends to do. Incremental cash from these assets sales may be needed to cover the company's interest and capex in the first half of the 2010.

The stable outlook reflects our expectation that Algar and Pod 1 will consistently produce bitumen in the range of 14,000 bpd and that the company's high leverage will decline. The rating could be upgraded if Connacher is able to demonstrate that it will be able to maintain bitumen production in the range of 14,000 to 15,000 bpd, maintain adequate liquidity to readily fund interest and capex, and lower its debt to EBITDA towards the 5x range. The outlook or rating could be lowered if liquidity appears insufficient to meet negative free cash flow or if Debt to EBITDA does not show improvement from current levels.

In accordance with Moody's Loss Given Default Methodology the notching of the first lien notes three notches above the CFR at B1 reflects their priority in the capital structure, with only the US$50 million first lien revolver and priority trade receivables ranking prior. The notching of the second lien notes at Caa2, reflects the cushion provided by the C$100 million subordinated convertible notes and regular trade payables.

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

The principal methodologies used in this rating were Independent Exploration and Production (E&P) Industry published in December 2008, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Connacher Oil and Gas Limited, headquartered in Calgary, Alberta, is an oil and gas company with primary focus on the development and production of oil sands.

Toronto
Terry Marshall
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
(416) 214-1635

Toronto
Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
Moody's Canada Inc.
(416) 214-1635

Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody's changes Connacher's outlook to stable
No Related Data.
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