TEXT-S&P rates Lone Pine Resources Canada 'B'

Mon Feb 6, 2012 10:07am EST

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;	
                        aniki_saha-yannopoulos@standardandpoors.com	
Secondary Contact: Nataliya  Nebrat, Toronto (1) 416-5073227;	
                   nataliya_nebrat@standardandpoors.com
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