Moody's lowers El Paso Production outlook

Moody's said it reduced El Paso Production Holding Co.'s rating outlook to negative from stable until production trends, proven developed reserve levels, reserve replacement cost trends, or other business or organizational developments demonstrate the compatibility of the company's debt and B2 rating.

Moody's estimated a very substantial sequential quarter for production decline in third quarter 2003, fulfilling operational concerns detailed in the agency's May 19 analysis. Moody's noted then that the company's 74% production concentration in very short-lived reserves, the nature of its development and exploration base, and its capital available for reinvestment in that base could be insufficient to sustain reserves, production, and capital costs suitable for the ratings.

El Paso Corp. wholly-owns El Paso Production Holding, which owns 45% of El Paso Corp.'s production and 54% of its oil and gas reserves.

A negative outlook will remain until sustainable production, proven developed reserves, and total unit-full cycle costs can be reliably gauged, the agency said.

El Paso Production Holding will need to first stabilize production this quarter, demonstrate acceptable year-end 2003 reserve replacement costs and results for the rating, and begin production growth in 2004. Year-end 2003 reserves will provide an update on capital productivity.

Moody's calculates a very substantial third quarter 2003 sequential quarter production decline. Such negative momentum is not easily reversed and it also increases unit interest expense.

Moody's believes the combination of: year-to-date production; pace of decline; risk of high leading edge finding and development costs; and a reduced $550 million to $600 million 2003 capital budget imply 2003 proven developed reserve decline and higher debt/proven developed reserves.

Ratings support comes from the current price environment, though 40% of 2003 and 22% of 2004 production is hedged well-under market at just over $3/million cubic feet; EPPH's long history in its major core regions and potential development cost benefits its substantial GOM production infrastructure, sophistication in commercially exploiting challenging geologic or reservoir conditions, and reasonable reserve replacement success in the past.

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