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| Costilla Energy $75 Million Senior Notes Rated 'B' by S&P; Outlook Stable |
NEW YORK, Jan. 8 /PRNewswire/ -- Standard & Poor's today assigned its
single-'B' rating to Costilla Energy Inc.'s proposed offering of $75 million
senior unsecured notes due 2006. At the same time, Standard & Poor's affirmed
its single-'B' corporate credit and senior unsecured debt ratings on the
company. The ratings outlook is stable.
Ratings on Costilla reflect its position as a small independent oil and
gas exploration and production company with high operating costs and an
aggressive financial policy. The company's proved reserve base -- located
primarily in the Permian Basin, Rocky Mountain region, and southeast Texas --
is small, resulting in limited operating flexibility. While Costilla's
production costs are higher than average, these are expected to trend down
over time given the recent divestiture of several high-cost properties
as well as an increased proportion of natural gas in the production mix.
Costilla's hedging program, balanced reserve and production profiles, and
measured geographical diversity somewhat mitigate commodity pricing risk.
While Costilla historically has grown primarily via acquisitions, the company
is increasing its emphasis on internally generated opportunities -- with
encouraging drilling results to date. This new emphasis should reduce
dependence on the market availability of economic reserves. The company's
long reserve life, coupled with a large inventory of drilling prospects on
existing properties, partly mitigates short- to medium-term reinvestment risk.
While cash flow is expected to strengthen on increasing output levels, overall
improvement in cash coverage measures likely will be limited by high interest
expense associated with Costilla's very high debt burden. Over the next few
years, cash flow interest coverage is expected to be adequate for the rating
category in the 3 times (x) to 4x range, with cash flow to total debt likely
to be in the 20%-30% range. The capital structure is expected to remain
aggressive, with debt leverage in excess of 80%.
OUTLOOK: STABLE
Moderate drilling success should allow Costilla to expand its reserve base
and bring on incremental output -- at relatively lower costs -- over the next
few years. Yet improvement in the ratings remains constrained by high
financial risk, Standard & Poor's said. -- CreditWire
SOURCE Standard & Poor's CreditWire
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Joy Magtoto of Standard & Poor's New York,
212-208-1808
