Moody's rates new Exco notes B2

Moody's assigned ratings for Exco Resources Inc., a private oil and gas exploration and production firm pursuing growth by acquisitions and exploitation. Moody' assigned a B1 senior implied rating and assigned a B2 rating to the company's proposed $300 million of senior unsecured notes due 2011.

The outlook is stable.

The company went private July 29 in a $344 million management buyout with the bulk of $175 million of private equity funding provided by funds managed by Cerberus Capital Management.

Moody's said ratings restraints include ongoing high leverage, inherent due diligence risk on acquisitions, and execution risk as private Exco grows by acquisition; scattered small reserve positions in many basins reflecting Exco's early stage strategy of opportunistically buying toehold positions when available; and high unit full-cycle costs, including very high unit G&A and interest costs.

The ratings are supported by a strong price environment while Exco digests NCE and works to reduce leverage; a high percentage of 2004 and 2005 production hedged at up-cycle prices (though this also restricts price upside); a high percentage of properties operated directly by Exco; material proven developed scale, a long durable proven developed reserve life of 13 years; a high 87% proportion of reserves in the funded and lower risk proven developed reserve category; a new larger core holding created by NCE; a sound 2004 price outlook; and a management team long seasoned in growing oil and gas production firms.

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