September 26, 2012 / 7:16 PM / 5 years ago

TEXT-S&P rates Plains Exploration & Production credit facility

Overview
     -- On Sept 10, 2012, we placed the ratings of Plains Exploration and 
Production Co. on CreditWatch negative following the company's announcement 
that it intends to acquire certain BP and Shell assets in the Gulf of Mexico 
for $6.1 billion.  
     -- The 100% debt financed transaction will initially be funded with the 
proceeds from a $5.0 billion secured credit facility and a $2.0 billion 
unsecured bridge facility.
     -- At the closing of the acquisition (which is expected to occur in 
November), we will likely lower the corporate credit rating to 'BB-' and 
assign a negative outlook.
     -- We are assigning a 'BB' issue rating and '2' recovery rating to the 
company's $5.0 billion senior secured credit facilities. In addition, we are 
assigning a 'B' issue rating and '6' recovery rating to the company's $2.0 
billion unsecured bridge facility.
 
Rating Action
On Sept. 26, 2012, Standard & Poor's Ratings Services said its ratings on 
Plains Exploration & Production Co. will remain on CreditWatch, where it
placed them with negative implications on Sept. 10, 2012. Upon completion of 
the transaction, we expect to lower the corporate credit rating on the company 
to 'BB-', assign a negative outlook, and lower the issue ratings on the 
company's existing unsecured debt to 'B'. 

At the same time, we assigned our 'BB' senior secured rating and '2' recovery 
rating to Plains Exploration & Production Co.'s new $5.0 billion senior 
secured credit facility--consisting of $3 billion secured revolver due 2017, 
$750 million secured term loan due 2017, and $1.25 billion term loan due 2019. 
We also assigned a 'B' rating and '6' recovery rating to the company's $2.0 
billion unsecured bridge facility. These ratings are not on CreditWatch 
negative.

Rationale
The initial negative CreditWatch listing followed the announcement that PXP 
intends to acquire BP's and Shell's interests in certain deepwater Gulf of 
Mexico properties in a debt-financed transaction for $6.1 billion. The 
acquisition will give PXP interests in the Marlin, Dorado, King, Horn 
Mountain, Holstein, Diana-Hoover, and Ram Powell fields in the deepwater Gulf 
of Mexico. 

Upon completion of acquisition, we will likely downgrade the company. The 
acquisition represents a strategic shift for Plains and presents increased 
execution risk, particularly given the complexities associated with operating 
in the deepwater Gulf of Mexico. While the company currently has offshore 
exposure through its working interest in Point Arguello and Point Pedernales 
in California, as well as its ownership of Plains Offshore Operations Inc. in 
the Gulf of Mexico, these operations represent less than 10% of the company's 
existing reserve base and are modest in scale relative to the assets the 
company is acquiring. Further, the debt-financed nature of the transaction 
results in a meaningful deterioration in the company's credit protection 
measures. While we currently forecast that the company's credit ratios could 
return to pre-acquisition levels over the next 12-18 months, we deem that this 
could be delayed if management expands capital investment beyond currently 
contemplated levels in pursuit of improving shareholder returns.

Despite these concerns, the transaction significantly expands Plains existing 
reserve base and production. The company estimates that these assets will 
increase proved reserves by 127 million barrel of oil equivalents (boe) and 
production by 67 thousand boe per day, representing increases of 31% and 68% 
respectively. New production will increase the company's exposure to oil 
production from current levels of 57% to approximately 70%. In addition, the 
company has numerous opportunities to expand its reserve base through 
recompletion, workover and tie-in opportunities.

Pro-forma for the transaction, debt to EBITDA, which has been trending in the 
mid-2x area, will rise to more than 3x. Under our current pricing assumptions 
($90 Brent and $3.00 natural gas in 2013), we estimate that leverage will fall 
to levels closer to 3x by the end of 2013. If the company is successful in 
completing planned divestitures (primarily its Haynesville and Madden assets), 
leverage could fall closer to 2.5x.

The ratings on the $7.0 billion of facilities the company is raising to fund 
the transaction reflect our assessment of the company's corporate credit 
rating following the transaction. For the complete recovery analysis, see 
Standard & Poor's recovery report on Plains Exploration & Production to be 
published on RatingsDirect following the release of this report.

CreditWatch
We will resolve the CreditWatch upon the closing of the acquisitions. If the 
transaction is completed upon substantially similar terms as those we 
currently expect, we will lower the corporate credit rating to 'BB-' and 
assign a negative outlook.

Related Criteria And Research
     -- Standard & Poor's Raises Its U. S. Natural Gas Price Assumptions; Oil 
Price Assumptions Are Unchanged, July 24, 2012
     -- Standard & Poor's Raises Its Oil Price Assumptions; Natural Gas Price 
Assumptions Unchanged, March 22, 2012
     -- Key Credit Factors: Global Criteria For Rating The Oil And Gas 
Exploration And Production Industry, Jan. 20, 2012
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
 
Ratings List

Plains Exploration & Production Co.
 Corporate credit rating        BB/Watch Neg/--

New Ratings

Plains Exploration & Production Co.
 $5.0 billion senior secured    BB                 
  Recovery rating               2
 $2.0 billion unsecured         B                  
  Recovery rating               6
 

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings referenced 
herein can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

Our Standards:The Thomson Reuters Trust Principles.
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