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Rating Action:

Moody's rates MEG's US$2 billion revolver Ba1; affirms Ba3 CFR

27 May 2013

Approximately $4.8 billion of debt affected

NOTE: On May 29, 2013, the press release was revised as follows: Corrected the third paragraph of the Regulatory Disclosures section from: The rating has been disclosed to the rated entity or its designated agent(s) and issued [with/ with no] amendment resulting from that disclosure. to The rating has been disclosed to the rated entity or its designated agent(s) and issued with amendment resulting from that disclosure. Revised release follows.

Toronto, May 27, 2013 -- Moody's Investors Service, ("Moody's") assigned a Ba1 rating to MEG Energy Corp.'s (MEG) US$2 billion senior secured revolving credit facility due May 2018. The Ba3 Corporate Family Rating (CFR), Ba3-PD Probability of Default Rating (PDR), Ba1 senior secured term loan rating and B1 senior unsecured notes rating were affirmed. The Speculative Grade Liquidity rating of SGL-2 was affirmed and the outlook remained stable.

Assignments:

..Issuer: MEG Energy Corp.

....US$2 billion Senior Secured Bank Revolving Credit Facility, Assigned Ba1

....US$2 billion Senior Secured Bank Revolving Credit Facility, Assigned a range of LGD2, 27 %

Affirmations:

..Issuer: MEG Energy Corp.

.... Probability of Default Rating, Affirmed Ba3-PD

.... Corporate Family Rating, Affirmed Ba3

....Senior Secured Bank Term Loan Credit Facility Mar 31, 2020, Affirmed Ba1

....Senior Unsecured Regular Bond/Debenture Mar 15, 2021, Affirmed B1

....Senior Unsecured Regular Bond/Debenture Jan 30, 2023, Affirmed B1

Withdrawals:

..Issuer: MEG Energy Corp.

....US$1 billion Senior Secured Bank Credit Facility Mar 1, 2017, Withdrawn , previously rated Ba1

....US$1 billion Senior Secured Bank Credit Facility Mar 1, 2017, Withdrawn , previously rated a range of LGD2, 22 %

RATINGS RATIONALE

MEG's Ba3 CFR reflects a very high current debt level (over $90,000 debt to production), the execution risk of constructing and ramping up Phase 2B to targeted levels through 2014, a relatively small current production base (under 30,000 bbls/day net of royalties), and exposure to volatile light/heavy differentials, as it produces bitumen. However, the rating also reflects MEG's significant cash position, which, along with cash flow, will enable MEG to complete Phase 2B in mid-to-late 2013 as well as advance its infill well project. We expect 75,000bbls/d of total production in the first half of 2015 from Phases 1, 2, 2B and the infill wells. The rating also considers MEG's substantial reserves and land position in key productive areas of the Athabasca oil sands region, all of which will be developed using steam-assisted gravity drainage (SAGD) techniques, and are amongst best-in-class SAGD assets as evidenced by a favorable steam oil ratio (SOR) of 2.4. The company also benefits from 50% ownership of the Access pipeline.

In accordance with our Loss Given Default (LGD) Methodology, the US$2 billion secured revolver and the US$1 billion secured term loan, which rank pari passu, are rated Ba1, two notches above the Ba3 CFR, reflecting the cushion provided by lower ranking unsecured notes. The US$800 million and US$750 million senior unsecured notes are rated B1, one notch below the CFR. For the unsecured notes rating, we have overridden the LGD Methodology outcome of B2, which is driven by the substantial increase in the revolver to $2 billion and the priority claim this represents. The override reflects our belief that MEG's next significant utilization of debt capital will be in the form of unsecured notes, which, coupled with minimal revolver utilization, would bring the notes rating back to the assigned rating of B1.

The SGL-2 speculative grade liquidity rating reflects MEG's good liquidity. As of March 31, 2013 MEG had C$1.8 billion of cash and short-term investments. Combined with an undrawn $2 billion revolver, which matures in 2018, MEG will have ample liquidity to cover negative free cash flow of about C$1.9 billion through to mid-2014 as Phase 2B and the infill wells are being completed and production ramps up. MEG has no financial covenants and good sources of alternate liquidity through its ability to monetize non-core assets or potentially joint venture their 100%-owned properties at Christina Lake or Surmont.

The stable outlook considers MEG's successful achievement of production in excess of design capacity at Phases 1 and 2, its large cash position and 100% ownership of a large base of long-lived bitumen reserves. The rating could be considered for upgrade if production is sustainable at 75,000 boe/day and the capital required to develop Phase 3A and Surmont is funded with a reasonable mix of cash flow, debt and equity, and E&P debt to production appears poised to decline towards $35,000 /boe and debt to PD reserves is on a declining trend. The ratings could be downgraded if it becomes apparent that MEG is unable to achieve 75,000 boe/day of production in 2015, if the operating economics of production deteriorate, or if it appears that leverage metrics will not improve from current levels.

The principal methodology used in this rating was Global Independent Exploration and Production Industry published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

MEG is a Calgary, Alberta based publicly-held SAGD oil sands development and operating company.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with amendment resulting from that disclosure.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Terry Marshall
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
(416) 214-1635

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

Moody's rates MEG's US$2 billion revolver Ba1; affirms Ba3 CFR
No Related Data.
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