Moody's rates Hilcorp note add-on B3

Moody's Investors Service said it assigned a B3 rating to Hilcorp Energy I, LP's $125 million offering of 7¾% senior unsecured add-on notes due 2015. The agency also affirmed Hilcorp's B2 corporate family rating, B2 (LGD4, 50%) probability-of-default rating and existing B3 (LGD4, 67%) senior unsecured note ratings.

The outlook is stable.

Note proceeds will repay borrowings under Hilcorp's $450 million senior secured bank revolver, leaving a small amount of borrowings under the revolver.

While the outlook remains stable, Moody's said this is due to Hilcorp's statement that it will reduce leverage on proven developed and proven reserves in 2008. Given its high leverage and high total unit full-cycle costs, Hilcorp's outlook and ratings will be vulnerable if year-end 2007 reserve replacement costs are weak, production trends weaken materially and/or if oil and gas prices and cash flow weaken materially, the agency warned.

The ratings are restrained by sharply higher leverage during 2007, the comparatively low proportion of proven developed producing reserves and the agency's expectation that Hilcorp may remain acquisitive.

Moody's said the ratings are supported by seasoned management and ownership, comparatively stable production, diversified exposure to oil and natural gas, a still supportive price environment and operating risk diversification across multiple, though very mature, producing regions.

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