TEXT-S&P rates Lone Pine Resources Canada 'B'
Feb 6 - -- Calgary, Alta.-based independent oil and gas exploration and production company Lone Pine Resources Canada Ltd. plans to issue senior unsecured notes to pay down the borrowings outstanding on its secured credit facility. -- We are assigning our 'B' long-term corporate credit rating to the company. -- We are also assigning our 'B-' issue-level rating and '5' recovery rating to Lone Pine's proposed US$200 million senior unsecured notes due 2017. -- The ratings reflect our assessment of the company's operations and execution risks associated with shifting to liquids-focused growth strategy and a moderately leveraged balance sheet. -- The stable outlook reflects our expectations that Lone Pine will achieve its growth objectives, increase its exposure to oil and liquids production, and improve its operating economics, while managing its balance sheet and liquidity prudently. Jan 25 - Standard & Poor's Ratings Services assigned its 'B' long-term corporate credit rating to Calgary, Alta.-based Lone Pine Resources Canada Ltd. The outlook is stable. At the same time, Standard & Poor's assigned its 'B-' issue-level rating and '5' recovery rating to the company's proposed US$200 million senior unsecured notes due 2017. Management plans to use proceeds to pay down the amount outstanding on its C$500 million secured credit facility. (For the complete corporate credit rationale, see the research report on Lone Pine to be published on RatingsDirect on the Global Credit Portal following this media release.) "The ratings on Lone Pine reflects what we view as the company's limited and small reserve base, meaningful exposure to low natural gas prices, and execution risks in operating as a stand-alone company while shifting to a liquid-focused growth strategy," said Standard & Poor's credit analyst Aniki Saha-Yannopoulos. In addition, we base the ratings on the company's operations in a highly cyclical, capital-intensive, and competitive industry. The ratings also reflect Lone Pine's growth prospects, undeveloped acreage, adequate liquidity, and profitability. As of Sept. 30, 2012, pro forma for the notes offering, we expect the company will have about C$317 million in adjusted debt, which includes operating lease adjustments and asset-retirement obligations. Lone Pine's geographic diversity is limited. As of 2011, the company had a small reserve base of approximately 401 billion of cubic feet equivalent (gross, 74% natural gas); production for 2011 was about 94 million cubic feet equivalent per day. Lone Pine's operations focus mostly in two regions in Alberta--the Evi and Deep Basin, which includes the Nikanassin play. Currently, almost 70% and 77% of reserves and production, respectively, are from these two plays. The company's reserve life is 11.7 years and proved developed reserve life at 5.6 years, which is in line with those of its land-focused peers. We view as positive the company's plan to increase its liquids production in the current weak natural gas price environment. Natural gas accounts for about 78% of the company's production. Lone Pine expects Evi production to drive most of its liquids production in the next two years and we expect oil and liquid to be a larger share of overall production. The company plans to focus its growth capital expenditure in the Evi light oil play; almost 80% of its 2012 capex budget of US$200 million-US$220 million will be for Evi. Although we believe there is some execution risk associated with the shift to liquids-focused growth, overall profitability could improve if Lone Pine can increase its liquid production. Given drilling inventory levels, there appears to be good visibility to the company's reserves and production growth associated with its Evi asset. We expect the company to hit the cash flow assumptions provided if it achieves its targeted liquids production. The stable outlook reflects Standard & Poor's expectation that Lone Pine will continue focusing on organic, drill-bit related reserves and production growth, which we expect will improve its exposure to liquids production. We expect that the company will not generate any free cash flow after funding its capital expenditures through 2013 and will fund its cash flow shortfall through revolver borrowings. The outlook also incorporates our view that Lone Pine's financial metrics will not materially deteriorate in the next 12-18 months, since its cash flow will improve because of increased liquids production. Given the company's size and operational plans, there is little likelihood of an upgrade during this period of expansion, but we would consider a positive action if it completes these plans successfully. A negative rating action could occur if Lone Pine cannot achieve internal reserves and production growth, its operational economics worsen, or its debt-to-EBITDAX increases above 4.5x due to operational setbacks or shareholder-friendly actions. RELATED CRITERIA AND RESEARCH -- Key Credit Factors: Global Criteria For Rating The Oil And Gas Exploration And Production Industry, Jan. 20, 2012 -- Standard & Poor's Lowers Its Natural Gas Price Assumptions; Oil Prices Unchanged, Jan. 18, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Primary Credit Analyst: Aniki Saha-Yannopoulos, CFA, PhD, Toronto (1) 416-507-2579; firstname.lastname@example.org Secondary Contact: Nataliya Nebrat, Toronto (1) 416-5073227; email@example.com
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