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Rating Action:

Rating Action: Moody's downgrades Energen's rating to Ba1; reviews Alabama Gas' rating, direction uncertain

08 Apr 2014

Approximately $1.4 billion of rated debt affected

New York, April 08, 2014 -- Moody's Investors Service downgraded Energen Corporation's (Energen) senior note rating to Ba1 from Baa3 following the announced sale of Alabama Gas Corporation (Alagasco) to The Laclede Group. Moody's assigned a Ba1 Corporate Family Rating with a negative outlook and a SGL-2 Speculative Grade Liquidity Rating to Energen. The A2 rating for Alabama Gas Corporation was placed under review, direction uncertain.

A complete list of the rating actions is as follows:

Energen Corporation

.Corporate Family Rating: assigned Ba1

....Probability of Default Rating: assigned Ba1-PD

....Senior Unsecured: downgraded to Ba1 from Baa3

.Loss Given Default Rating: assigned LGD4-52%

.Senior Unsecured MTN: downgraded to (P)Ba1 from (P)Baa3

.Senior Unsecured Shelf: downgraded to (P)Ba1 from (P)Baa3

.Preferred Shelf: downgraded to (P)Ba3 from (P)Ba2

....Outlook: Negative

Issuer: Alabama Gas Corporation

.Senior Unsecured: A2 ratings under review, direction uncertain

.Senior Unsecured MTN: (P)A2 ratings under review, direction uncertain

.Outlook: changed to ratings under review from negative

"Moody's downgrade of Energen reflects our concern that the weak capital efficiency reported for 2013 will continue into 2014 and beyond, hindering Energen's ability to build scale," said Stuart Miller, Moody's Vice President. "Energen's scale and leverage is comparable to Ba2 rated companies. However, the ownership of Alagasco provides one notch of uplift. With the sale of Alagasco, Energen will become a pure play exploration and production company. The reduction in leverage that will result from the sale is helpful from a ratings perspective, but a further downgrade is possible if Energen fails to deliver increasing levels of production, reserves, and capital efficiency without an increase in leverage."

RATINGS RATIONALE

Moody's rates Energen primarily as an E&P company since those operations represent over 80% of consolidated EBITDA and assets. On a stand-alone basis, Energen's scale, as measured by reserves and production, more closely resembles a Ba2 company. The ownership of Alagasco, with its stable rate-based cash flow, provides uplift to support the Ba1 rating. Once Alagasco is sold, Energen will use the sales proceeds to reduce leverage which will offset the negative impact of the loss of Alagasco's stable cash flow. However, significant growth in reserves and production will be needed to support the Ba1 rating on a stand-alone basis. Until capital efficiency improves, this will be difficult to achieve. Energen's core holdings in the Permian Basin are a work in process as the company works its way up the learning curve. Finding and development costs in 2013 were in excess of $26 per Boe, a level that exceeds every other Permian Basin focused producer that we rate. Stabilizing its rating will be highly dependent on the level of success Energen achieves in bringing this cost more in line with its peers.

Our downgrade action follows Energen's failure to meet the year end 2013 leverage targets that Moody's set in early 2013 when the ratings were assigned a negative outlook. E&P debt to average daily production was nearly $26,000 and debt to proved developed reserves was $6.90. The inability to reduce leverage organically was an important factor in the downgrade decision as it results from the weak capital efficiency realized in 2013 -- the leveraged full cycle ratio was only 1.1x at year end 2013. A continuation of this level of capital efficiency will make production and reserve growth difficult without an increase in leverage.

The rating of Alagasco on a stand-alone basis would be a strong single A, however its current rating is influenced by the credit metrics of its parent. The five notches of difference between the ratings of Energen at Ba1 and Alagasco at A2 is considered unusual and significant. Therefore, the downgrade of Energen pressures Alagasco's rating and would normally lead to the downgrade of the utility company. However, should the sale of Alagasco to The Laclede Group (Laclede, Baa1 negative) be completed as planned, the need for a downgrade is reduced because of the relatively stronger acquirer. For this reason, we have placed Alagasco's rating under review, direction uncertain to reflect the possibility of a downgrade if the sale is not completed. If the sale is completed as planned, it is likely the Alagasco rating will be affirmed, or possibly upgraded.

Both Energen and Alagasco have adequate liquidity. From a cash flow perspective, Energen is expected to outspend cash flow in 2014 by over $100 million, although a significant portion of its $1.1 billion capital expenditure budget is discretionary. There is ample room under its revolving credit facilities to fund this small projected deficit. Energen and Alagasco have revolving credit facilities that total $1,250 million and $100 million, respectively. At December 31, 2013, Energen had over $800 million of availability under its credit facilities. Both facilities require the ratio of debt to total capitalization to be maintained below 65%. Neither company is in danger of violating this covenant by a wide margin. The credit facilities are unsecured, therefore each company could sell assets to generate additional liquidity.

The Corporate Family Rating of Energen could be downgraded to Ba2 if debt to average daily production remains above $20,000 per Boe after the sale of Alagasco and if the leveraged full cycle ratio remains below 1.5x at year end 2014. An upgrade is unlikely without significant improvement in scale and a good track record of reserve and production growth, but only if the leveraged full cycle ratio is comfortably over 1.5x.

The rating at Alagasco could be downgraded if the sale falls through or if the ratio of operating cash flow to debt falls below 25%. After the sale to Laclede, a stabilization of the outlook or an upgrade is possible depending on the post-acquisition capitalization of Alagasco as well as Laclede.

The principal methodologies used in this rating were the Global Independent Exploration and Production Industry published in December 2011, the Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009, and the Regulated Electric and Gas Utilities Industry published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Birmingham, Alabama, Energen Corporation is a holding company whose subsidiaries engage in natural gas and crude oil production and natural gas distribution.

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.

Stuart Miller
VP - Senior Credit Officer
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

Rating Action: Moody's downgrades Energen's rating to Ba1; reviews Alabama Gas' rating, direction uncertain
No Related Data.
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