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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: James Cherney who wrote (41766)	4/7/1999 2:59:00 PM
From: still learning	Respond to of 95453

Anyone understand the PZE debt downgrades? Seems to me they benefit from current proices. Moodys downgraded a couple of days ago. Wednesday April 7, 2:25 pm Eastern Time S&P cuts PennzEnergy debt ratintgs ( PRESS RELEASE PROVIDED BY STANDARD & POOR'S) NEW YORK, April 7 - Standard & Poor's today lowered its ratings on PennzEnergy Co. (see list below). The outlook is stable. The downgrade reflects PennzEnergy's financial deterioration caused by an excessive debt burden that has been exacerbated by relatively low oil and natural gas prices, high ongoing capital requirements because of a short reserve life, falling production, worsening finding and development costs, and rising unit operating costs. In addition, Standard & Poor's projects that PennzEnergy will continue to run significant cash flow deficits. Houston, Texas-based PennzEnergy, a medium-sized exploration and production company, was formed in 1998 from the upstream operations of the former Pennzoil Co. Following the spin-off of its refined product and lubricants operations, the company was saddled with $1.5 billion of debt in a very low oil and gas price environment. PennzEnergy's financial performance was further pressured by dismal exploratory drilling results and unexpectedly severe production declines that helped to cause unit operating costs to rise to more than $4.50 per barrel (including general and administrative expenses but excluding one-time items), which is somewhat worse than the industry average. As a result of the aforementioned factors, year-end total debt to total capital (netting out $739 million of debt that is exchangeable into 7.1 million shares of Chevron Corp. common stock) rose to about 67% from 53%, and earnings before interest, taxes, depreciation, amortization, and exploration expense (EBITDAX) interest coverage fell to about 3.3 times (x) from 4.2 in 1997. These results were cushioned by PennzEnergy's natural gas exposure, which accounts for 58% of total production. For 1999, Standard & Poor's anticipates that credit measures will worsen because of lower production, continued weak hydrocarbon pricing, and persistent cash flow deficits. However, PennzEnergy could benefit from higher natural gas prices later In 1999 (after a possible period of near-term, seasonal weakness) because of reduced industrywide drilling activity and continued secular demand growth. To immediately improve its financial position, PennzEnergy has cuts its capital spending budget to about $250 million in 1999 from $400 million in 1998 and has refocused efforts on lower risk domestic properties that had been neglected in recent years as the company strove for international and offshore growth. However, Standard & Poor's does not believe that the new budget and operating strategy will enable the company to arrest production declines in 1999. Although management has implemented strategies to increase exploration exposure while cutting capital outlays, PennzEnergy also may have difficulty fully replacing production in 1999 from internal cash flow without improvement in finding and development costs. If PennzEnergy is unable to increase its capital spending rate in 2000, Standard & Poor's is concerned that PennzEnergy may suffer additional deterioration in its productive capacity because of the very steep production decline curve of its domestic property base. The downgrade also reflects PennzEnergy's weakening financial flexibilitY during a period when the company is expected to run substantial cash flow deficits. For 1999, Standard & Poor's projects that PennzEnergy will have discretionary cash flow that will total less than 50% of its planned capital spending budget. PennzEnergy currently has no hedges in place, which sensitizes the company to possible declines in oil and natural gas prices. Financial flexibility is supported by access to a $500 million committed bank credit facility (that was undrawn as of Dec. 31, 1998) and from the possible sale of portions of its sizable asset base. OUTLOOK: STABLE The stable outlook anticipates that PennzEnergy will exploit potential improvement in pricing conditions to strengthen its capital structure and reduce its fixed charge burden, Standard & Poor's said. OUTSTANDING RATINGS LOWERED Rating To From PennzEnergy Co. Corporate credit rating BB BBB Senior unsecured debt BB BBB Senior unsecured subordinated shelf BB/B+ BBB/BBB- (preliminary rating) Preferred stock B BB+ Commercial paper rating B A-2