Moody's rates Ipiranga notes B2

Moody's Investors Service assigned a B2 rating to Companhia Brasileira de Petroleo Ipiranga's proposed $100 million senior unsecured step-up notes due 2008. The outlook is stable.

Moody's noted that the rating is capped at its Brazil country ceiling for foreign currency bonds and notes of B2.

The rating reflects Ipiranga's position as the second largest fuel distribution and marketing company in Brazil and its demonstrated ability to defend its 13-14% market share in the Brazilian combustible fuels market.

The rating is also supported by the company's consistent operating margins and recent investment in the modernization of its retail outlets, with more than half of its 3,510 retail outlets updated to a modern "one-stop" convenience format.

Finally, the rating incorporates Moody's expectation that if the 2005 put option is exercised the company would likely have access to uncommitted bank credit lines to amortize the notes, given that all short-term bank debt will be amortized with the proceeds from the issuance.

Moody's projects that adjusted annual free cash flow as a percentage of total debt will average more than 20% during the term of the notes. EBITDA to interest expense was 8.2x in 2002 and is expected to average 4.5x during the term of the notes.

S&P rates Hilcorp notes B

Standard & Poor's assigned a B rating to Hilcorp Energy I LP's planned $350 million senior unsecured notes maturing 2010. The outlook is stable.

S&P said Hilcorp's ratings reflect a below-average business profile and aggressive financial leverage.

Hilcorp's business profile is supported by a proven history of low finding costs, a strong operational record and control over nearly 90% of its net production, S&P said. The relatively low decline rates associated with Hilcorp's properties provide a degree of stability to the small reserve base.

In addition, the company's aggressive hedging program serves to mitigate commodity price risk.

Geological risk offsets much of Hilcorp's business profile strength, S&P said. Management's strategy to acquire properties and then augment production through workovers and downhole and surface facility enhancement creates a modest amount of operating risk and requires extensive engineering expertise. In addition, Hilcorp has a narrow geographical focus.

Hilcorp's financial weakness stems from debt incurred to finance the buyout of one of the company's two equal limited partners and the acquisition of varied oil and gas properties, primarily from ConocoPhillips, S&P said. The company will have slightly over $5 of debt per barrel of oil equivalent (boe) after the close of its pending notes issuance.

However, Hilcorp's hedging program should provide significant cash flow after capital expenditures through 2007, allowing the company to either acquire additional producing properties or to reduce debt outstanding under its credit facility, S&P said.

Moody's rates Energy Partners notes B2

Moody's Investors Service assigned a B2 rating to Energy Partners, Ltd.'s planned $150 million seven year senior unsecured guaranteed notes. The outlook is stable.

Moody's said the rating benefits from strong pro forma liquidity, a still-supportive price environment, moderate net debt on proven developed (PD) reserves, seasoned management and acceptable risk balance in its drilling program relative to cash flow and capital.

Negatives are small total reserves; particularly small proven developed producing (PDP) reserves; credit implications of a particularly short PDP reserve life and short 4.6 year PD reserve life; high leveraged full-cycle unit costs; 52% of production concentrated in the East Bay Field (though repeatability is aided by roughly 30 of EPL's 80-plus prospects being located in East Bay); heavy capital needs; and acquisition risk with attendant due diligence and overpayment risk.

To solidify the ratings and retain a stable outlook, Energy Partners will need to reinvest cash flow and balance sheet cash with sufficient productivity to consistently grow PD reserves relative to debt, production relative to preferred dividends and interest expense, positive sequential quarter production trends, and acceptable combined total of unit operating, G&A, interest, and reserve replacement costs.

Moody's anticipates between $145 million and $165 million of 2003 EBITDAX, annualized pro-form interest expense and preferred dividends of roughly $16 million to $17 million, and approximately $110 million of capital spending. Based on Energy Partners' reported $7.70/boe three-year average reserve replacement costs, Moody's calculates Energy Partners' leveraged full-cycle costs to be approximately $19/boe to $20/boe, consisting of $6/boe of production costs, a high $3.25/boe to $3.50/boe of annualized G&A costs, interest and preferred dividends in the range of 2.30/boe, and the $7.70/boe of RRC's.

S&P rates Energy Partners notes B+

Standard & Poor's assigned a B+ rating to Energy Partners Ltd.'s proposed $150 million senior unsecured notes due 2010. The outlook is stable.

S&P said Energy Partners has been successful in increasing reserves through its acquisition and exploitation strategy. However, the company is challenged by a relatively short reserve life and creeping finding costs in its core operating areas. All-in finding and development costs (including acquisition) are about $7.60 (three-year average) and lifting costs around $5.00 per boe. While Energy Partners has a number of drilling prospects, significant growth is expected to come from future acquisitions.

Pro forma for the transaction, total debt to capital is roughly 38% (47% if preferred stock is considered debt). EBITDA interest coverage is expected to be above 7x at midcycle hydrocarbon prices, although coverage measures in 2003 are likely to be stronger because of current commodity prices and the company's commodity price-hedge position; roughly 50% of 2003 production hedged at favorable prices, S&P noted. However, only 10% of 2004 natural gas production is hedged, which materially exposes the company's cash flow to commodity price swings.

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