TEXT-Moody's revises Petrohawk Energy outlook to negative

(The following statement was released by the rating agency)

Approximately $2.1 billion of debt affected

Jan 22 - Moody's Investors Service assigned a B3 (LGD4-69%) to Petrohawk
Energy Corporation's HK.N (HK) new $300mm senior notes due 2014 and revised
the LGD point estimate on the existing senior notes to LGD4-69% from LGD5-73%.
Simultaneously, Moody's affirmed the company's B2 Corporate Family Rating (CFR)
and B3 rating on the existing senior unsecured notes, while also lowering the
speculative grade liquidity rating to SGL-3 from SGL-2. The outlook has also
been changed to negative from stable.
The negative outlook reflects increasing leverage on HK's reserves and
production as the company pursues an aggressive, significantly debt-funded
growth capital program. The company is pushing forward with an intense drilling
program that is expected to result in the company's outspending of cash flow
for 2009 in the face of depressed commodity prices. This outspending of cash
flow is partially driven by the shorter time frame in which the company has to
establish production on a portion of its acreage position in the Haynesville,
as well as the need to build out the infrastructure there to take its gas to
premium markets. This expected cash flow deficit is resulting in debt currently
outpacing the growth in reserve and production which is causing HK's leverage
profile to be weaker than its similarly rated peers. In addition, due to the
lead time required to develop its undeveloped acreage and ramp up production,
leverage on the proven developed (PD) reserves and production is expected to
increase compared to 2007 levels and rank at the high end for the single B peer
group as the company utilized a significant amount of debt to purchase its
acreage positions.
The negative outlook also considers our view that the company's finding and
development (F&D) costs will be higher for 2008 than in previous years. With
the acquisition of raw undeveloped acreage totaling more than $1.5 billion in
2008, HK's F&D is expected to rise significantly. Moody's recognizes that as
the company continues to have success in developing its acreage, F&D costs will
likely improve. However, given that its Haynesville Shale play is still in a
fairly early stage, the capital program for 2009 will provide a very good
indication of the company's progress in the play.
Returning to a stable outlook will depend on the company raising additional
funding through an equity issue or other sources to reduce leverage on its
reserves. A stable outlook would also require the company to continue to report
sequential quarterly production growth, as this will provide intra-year signals
that the 2009 capital spending plan is productive. However, the rating could be
downgraded if leverage increases, if production growth is stalled, or if there
are indications that reserves replacement is lower than expected despite the
aggressive spending program.
While the company will have a ceiling test write-down related to the carrying
value of its reserves in the range of $1.1 billion to $1.3 billion, the
writedown does not impact the ratings or outlook as we continue to remain
focused on the reserve volumes booked rather than on the accounting effect of a
ceiling test write-down. Despite this write-down, HK is expected to show good
year-over-year reserve growth, though the mix of proven undeveloped (PUD)
reserves is likely to increase.
The B2 CFR continues to reflect the company's significant size and scale, which
are more in-line with the Ba rated peer group. In addition, the company's
growth of both its reserves and production, as well as its track record of
issuing equity to fund some of its acreage acquisitions, serve as supporting
factors for the company's ratings.
The downgrade of the SGL rating to SGL-3 reflects the expectation that overall
liquidity will likely tighten from current levels over the next twelve months,
though it is expected to adequately cover the company's needs for capex,
interest, and working capital. The planned note issuance will provide
additional liquidity, HK had reduced its capital spending plans by
approximately one-third ($500 million), and the company currently has ample
availability under its senior secured revolving credit facility. However, HK is
expected to significantly outspend its cash flow for the year, which will
result in additional usage of its revolving credit facility, and like other
speculative grade exploration and production (E&P) companies, HK is exposed to
a reduction in its borrowing base in early Q2'09. Reduction in the borrowing
base across the sector will be a function of lower commodity prices but may
also be a result of the uncertain credit market conditions which may impact the
composition of lender group in the credit facility. Moody's expects that HK
will remain within compliance of its covenants and that the ceiling test
write-down is not expected to have any impact on covenant compliance. If
commodity prices weaken further and result in lower cash flows, Moody's could
consider lowering the current SGL-3 rating.
Moody's revision of the LGD point estimate for Petrohawk's existing notes, in
accordance with the LGD methodology, arises from the increased proportion of
senior unsecured debt in the capital structure.
Moody's last rating action for Petrohawk dates from May 7, 2008, at which time
we assigned ratings to its new notes offering and affirmed existing ratings.
The principal methodology used in rating Petrohawk was the Global Exploration
and Production (E&P) rating methodology which can be found at www.moodys.com in
the Credit Policy & Methodologies directory, in the Ratings Methodologies
subdirectory. Other methodologies and factors that may have been considered in
the process of rating Petrohawk can also be found in the Credit Policy &
Methodologies directory.
Petrohawk Energy Corporation is headquartered in Houston, Texas and is engaged
in the exploration, production, acquisition, and exploitation of oil and
natural gas.
(New York Ratings Team)