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Rating Action:

Moody's downgrades MEG Energy to B1; negative outlook

18 Feb 2009

Approximately US$750 Million of debt facilities affected

New York, February 18, 2009 -- Moody's Investors Service downgraded MEG Energy Corp.'s (MEG) Corporate Family Rating to B1 from Ba3 and downgraded its senior first secured debt ratings to B1 from Ba3. Facility ratings downgraded include MEG's now B1 rated US$700 million delayed draw senior first secured term loan maturing March 2013 and its now B1 rated undrawn US$50 million senior first secured revolving credit facility maturing April 2009. The ratings had been under review for downgrade since December 2, 2008.

The rating outlook is negative, though it will be considered for a move to stable when MEG completes the arrangement of a new bank revolver of up to US$150 million and the raising of approximately US$500 million of equity. The new ratings assume that MEG will complete these financings soon. Accordingly, the ratings would need to be revisited if these financings do not proceed.

While Moody's believes MEG will have soon arranged sound liquidity for ongoing project development, and the project is heavily equity funded, the rating downgrades also reflect substantially reduced expected bitumen price realizations and the uncertain margin impact due to the extended period of time before MEG's full commercial scale SAGD operations will be up and running and steam-oil ratios and other cost and economic relationships can be observed. The ratings would have upward mobility if these uncertainties are resolved favorably.

The ratings are supported by MEG's 100% ownership of a world class large base of long-lived bitumen reserves and indicated favorable unit costs at its Phase I pilot project, currently producing in the range of 3,000 barrels per day of bitumen. However, first material operating cash flow will not occur until late 2009. MEG believes cash flow will rise thereafter on growing production through first half 2010 and hit full Phase II production of 22,000 Bpd (incremental to Phase I production) by fourth quarter 2010.

Due to market conditions, MEG postponed a third quarter 2008 note offering and is in the process of negotiating to expand its revolver to between US$50 million and US$150 million, extend its maturity to mid-2013, and arrange a large private equity offering in which it believes existing investors will participate. As of January 31, 2009, MEG held C$202 million in cash, which would rise substantially if MEG completes its US$500 million equity offering. At year-end 2008, MEG had approximately US$687 million (C$824 million) in term loans maturing in March 2013 and book net worth of approximately C$2.2 billion.

Until new equity funding is raised, MEG has been limiting capital spending to remaining Phase II outlays and a small level of preliminary Phase IIB and other outlays. With sharply scaled back outlays, Moody's estimates that MEG has adequate funding for Phase II until roughly mid-2009. First quarter 2009 outlays are set for just over C$165 million including C$16 million capitalized interest, second quarter 2009 just over C$76 million, and second half 2009 at less than C$20 million in capital outlays. Phase II production is expected to commence by third, if not second, quarter 2009.

MEG's ratings have been assigned by evaluating factors that Moody's believes are relevant to the company's risk profile, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. These attributes were compared against other issuers both within and outside MEG's core industry; MEG's ratings are believed to be comparable to those of other issuers with similar credit risk.

The last rating action was on December 2, 2008 when MEG's existing ratings were placed under review for possible downgrade.

MEG Energy Corp. is privately held and headquartered in Calgary, Alberta, Canada. It is developing a steam-assisted-gravity-drainage (SAGD) oil sands project that holds approximately 350 million barrels of net proven bitumen reserves (433 million gross) and 1.532 billion of gross proven plus probable reserves.

New York
Steven Wood
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Andrew Oram
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades MEG Energy to B1; negative outlook
No Related Data.
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