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Rating Action:

Moody's reviews Sabine Oil & Gas for upgrade and changes Forest Oil's outlook to stable

06 May 2014

$1.0 billion Sabine rated debt and $800 million Forest rated debt affected

New York, May 06, 2014 -- Moody's Investors Service (Moody's) placed under review for upgrade Sabine Oil & Gas LLC's (Sabine) B3 Corporate Family Rating (CFR), Caa1 second lien term loan rating and Caa2 unsecured notes rating. Moody's affirmed Forest Oil Corporation's (Forest) B3 CFR and its Caa1 unsecured notes rating. Moody's changed Forest's outlook to stable from negative.

These rating actions were prompted by Sabine's announcement that it will acquire Forest in an all-stock combination of Sabine and Forest under a newly incorporated public holding company, Sabine Oil & Gas Corporation (Newco). Sabine will assume Forest's existing $800 million of unsecured notes. Each company's board of directors has approved the transaction. Closing is expected by 2014's fourth quarter.

"The combination of Sabine and Forest joins two companies whose principal assets in East Texas and the Eagle Ford Shale are highly complementary, creating a company much larger in size and scale than the two companies are individually," commented Andrew Brooks, Moody's Vice President. "Moreover, structured as an all-stock transaction, the transaction in aggregate is not leveraging and through anticipated production gains and efficiencies is expected to reduce the high debt leverage relative to production and cash flow which presently characterizes each of the companies individually."

Issuer: Sabine Oil & Gas LLC

.... Probability of Default Rating, Placed on Review for Possible Upgrade, currently B3-PD

.... Corporate Family Rating, Placed on Review for Possible Upgrade, currently B3

....Senior Secured Bank Credit Facility, Placed on Review for Possible Upgrade, currently Caa1

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Possible Upgrade, currently Caa2

.... Speculative Grade Liquidity Rating, Affirmed SGL-3

....Outlook, Changed To Rating Under Review From Stable

..Issuer: Forest Oil Corp.

.... Probability of Default Rating, Affirmed B3-PD

.... Speculative Grade Liquidity Rating, Affirmed SGL-3

.... Corporate Family Rating, Affirmed B3

....Senior Unsecured Regular Bond/Debenture, Affirmed Caa1

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

The review for upgrade is predicated on the combination of Sabine and Forest creating a merged company that would support a B2 Corporate Family Rating. The combined companies' production on a pro forma basis will exceed 50 thousand barrels of oil equivalent (Boe) per day. The two companies' principal assets are highly complementary, establishing a significant combined presence in East Texas with 275,000 net acres, including a strong position in the liquids-rich Cotton Valley Sands. With approximately 64,000 net acres in the Eagle Ford Shale, where Forest has struggled to generate production growth, merged operations will also build scale. The review will also examine the likelihood of Sabine creating opportunities for portfolio rationalization, achieving synergies and enhancing its financial flexibility. Moody's expects to conclude its review upon the closing of the transaction, planned for late in 2014's third quarter or early fourth quarter.

The Sabine review will focus on the increased size and scale achieved through the Forest transaction, together with the leverage and cash flow metrics of the merged companies. Upon the closing of the acquisition and the assumption of Forest's debt, a rating upgrade could be considered to the extent debt on production falls below $40,000 per Boe and retained cash flow (RCF) to debt approaches 20%. Given the review for upgrade, a ratings downgrade would be considered unlikely, however, a downgrade could be considered if the combined companies' production falls below 50,000 Boe per day, resulting in debt leverage increasing to $50,000 per Boe of average daily production with RCF to debt dropping back into the mid-teens.

Sabine will assume Forest's existing $800 million unsecured notes. To the extent Forest's notes are put to Sabine under the notes' change-of-control provisions, Sabine will bridge those purchases under a new $850 million committed backstop facility, with the intent of refinancing any notes so purchased with new senior unsecured debt. Sabine also expects to enter into a new $2.0 billion secured revolving credit facility, providing for an initial borrowing base of $1.0 billion, secured on a first-lien basis by substantially all of the company's assets. The expanded revolver has been sized to provide sufficient liquidity together with cash from operations to fully fund the merged companies' drilling program through 2015. Forest's existing $300 million secured borrowing base revolving credit facility, under which there were no outstandings at March 31, would be terminated.

Sabine's $650 million senior second-lien term loan is secured by a second lien on company assets, while its $350 million senior notes due 2017 would rank pari passu with the $800 million of assumed Forest notes, unsecured and guaranteed on a senior unsecured basis by the company's operating subsidiaries. Sabine's second-lien term loan is rated one-notch beneath the B3 CFR under Moody's Loss Given Default (LGD) Methodology, while the unsecured notes are rated two-notches beneath the CFR. Should the Sabine review result in a one-notch upgrade in the CFR to B2, Forest's unsecured notes rating would remain unchanged at Caa1, pari with an upgraded Caa1 rating on Sabine's unsecured notes.

As an all-stock transaction, pro forma combined debt leverage remains relatively unchanged at approximately $40,000 per Boe of average daily production while RCF to debt remains in the high-teens. Moody's has cited elevated debt leverage and weak cash flow metrics as key factors influencing the B3 ratings of each of the companies individually. Each company's production consists of about 65% natural gas, a production profile which Moody's sees changing little in the future, and one which will continue to impinge on cash flow in a weak gas price environment. However, Sabine alone increased its production by 30% in 2013, and presuming it continues to generate production growth on a combined basis at least in the mid-teens, leverage and profitability metrics should show steady improvement.

The principal methodology used in this rating was the 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.

Sabine, previously known as NFR Energy LLC, is a privately held exploration and production (E&P) company whose operations commenced in 2007. Originally funded by First Reserve Corporation and a subsidiary of Nabors Industries Ltd. (Baa2 stable), First Reserve acquired 100% of Nabors's interest in Sabine's parent holding company effective December 2012, making First Reserve the 99.6% owner of Sabine.

Sabine Oil & Gas LLC is a privately held E&P partnership headquartered in Houston, Texas. Forest Oil Corporation is an independent E&P company headquartered in Denver, Colorado.

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Andrew Brooks
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's reviews Sabine Oil & Gas for upgrade and changes Forest Oil's outlook to stable
No Related Data.
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