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Global Credit Research - 28 Jan 2011
Approximately $370 million of debt securities affected
Toronto, January 28, 2011 -- Moody's Investors Service assigned a Caa1 rating to Paramount Resources
Ltd.'s (Paramount) proposed offering of C$70 million of
senior unsecured notes and upgraded the rating on its existing senior
unsecured notes to Caa1 from Caa2. Moody's also affirmed
the company's B3 Corporate Family Rating (CFR). The proceeds of
the new notes issue will be used for capital expenditures and general
corporate purposes. The upgrade in the senior unsecured rating
reflects the replacement of anticipated secured debt with $70 million
of unsecured debt . The lower amount of prior ranking secured debt
in the capital structure than previously anticipated results in a rating
of the unsecured notes only one notch below the B3 CFR. The rating
outlook remains negative.
Paramount's B3 CFR is supported by its substantial alternate liquidity
and historically low leverage, which has weakened substantially
with its two recent notes issuances, but is expected to improve
over the next 18 months as new production comes on-stream and reserves
are added. The rating also considers the more than 50 percent management
ownership of Paramount. The rating is constrained by the company's
poor operating track record, small production and reserves base
(13,200 barrels of oil equivalent (boe) net of royalties and 19.2
million boe total proved), and high full-cycle costs (US$75/boe)
that have limited organic reserves replacement.
The negative outlook reflects a significant increase in Paramount's near
term leverage and the considerable execution risk surrounding the plan
to rapidly grow upstream natural gas production in 2011 and 2012 in tandem
with the expansion of midstream gas processing capacity. The production
growth will materialize over time and only after significant incremental
debt has been incurred, leaving leverage (on a debt to production
basis) elevated in the near term. Furthermore, the company
is ramping up production at a time when natural gas prices are expected
to remain under pressure due to soft demand and continued rapid growth
in shale gas production in North America.
Paramount plans to spend over $100 million in building midstream
facilities and considerably more in drilling, completion and tie-in
costs in pursuit of almost tripling its upstream production over the next
two years. In recent years, the company has been unable to
show organic growth, and has not proven to be a cost effective operator
of E&P assets.
Due to heavy upfront capital expenditures, Paramount will also experience
steady erosion in liquidity until early 2012, when production reaches
a higher plateau and elevated capital spending needs dissipate.
However, the company will have the flexibility to pare back spending
in the event of protracted weak natural gas prices, as both midstream
and upstream development is expected to occur in modular fashion.
In the past, the company has also shown the willingness to monetize
its equity holdings to improve liquidity and repay debt.
Pro forma for the $70 million of new notes, the C$300
million of notes and C$60 million of equity issue in November 2010,
and anticipated debt repayments, we estimate that Paramount had
approximately C$226 million of cash and C$143 million of
available borrowing capacity (after excluding C$17 million LCs
outstanding) under its C$160 million borrowing base revolving credit
facility at September 30, 2010. There is a high likelihood
that the company will have used up most of this liquidity by the end of
2011. The company would then need additional external financing
to fund a portion of its growth capex. To meet this liquidity need,
we would expect Paramount to expand its reserves-based borrowing
base revolver following the addition of significant amounts of proved
developed producing (PDP) reserves.
We note that Paramount has substantial alternate liquidity through the
value in its equity investments. The combined market value of Paramount's
quoted investment portfolio was approximately C$444 million at
Sept 30, 2010. Paramount's bank lenders have a first charge
over the producing assets of Paramount, but not the equity investments.
The investment portfolio represents an important pool of liquidity to
The rating could be downgraded to Caa1 if Paramount is unable to attain
production growth within the anticipated capex and timeline causing leverage
to remain elevated over a longer period, or if the company runs
into liquidity problems. The outlook would return to stable if
the company can lower leverage as measured by debt to production below
US$20,000 per boe on a sustainable basis while bringing production
and capital expenditures to a more steady state.
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.
Paramount Resources Ltd. is a Calgary, Alberta based predominantly
natural gas producing E&P company with principal properties in Alberta,
the Northwest Territories, British Columbia, Montana,
and North Dakota.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
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.
Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
Moody's Canada Inc.
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
Moody's Canada Inc.
Moody's rates Paramount's new notes Caa1, upgrades existing notes
70 York Street
Toronto, ON M5J 1S9
No Related Data.
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