July 6 - Overview -- In January 2012, the board of directors for independent U.S. exploration and production company Venoco approved the takeout offer from the company's chairman and CEO to purchase the company for $1.45 billion. -- We are keeping the ratings on Venoco Inc. on CreditWatch with negative implications pending further information regarding the financing of the buyout deal. -- We will resolve the CreditWatch once the company obtains details regarding financing of the buyout deal. Rating Action On July 6, 2012, Standard & Poor's Ratings Services kept its ratings on Denver-based Venoco Inc., including the 'B' corporate credit rating, on CreditWatch with negative implications, where it placed them on Jan. 18, 2012. Rationale Standard & Poor's placed its ratings on Venoco on CreditWatch negative following the announcement that the company had entered into a definitive merger agreement under which its chairman and CEO, Tim Marquez, would acquire the company through a wholly owned entity, Denver Parent Corp. (unrated). The announcement followed a five-month evaluation of the proposal by a special committee of Venoco's board of directors, which concluded that Marquez's proposal was in the best interests of the public shareholders. Venoco extended the deadline until July 20 for its CEO to arrange financing for the proposed buyout. The total purchase price is about $1.45 billion, including the assumption of $685 million in debt. Marquez, along with affiliated trusts and foundations, currently owns 50.3% of Venoco's common shares outstanding, which, if the deal is approved, will be reinvested into Denver Parent. Consequently, Denver Parent will have to raise about $385 million to $400 million to fund the buyout, including fees and expenses. If the buyout is funded with equity, there would be minimal impact to our leverage ratios. However, if the deal is funded with 50% or more debt, as we expect, debt-to-EBITDAX could exceed 5x at the end of 2012, which is above our expectations for the current rating. (Our EBITDAX estimates are based on Standard & Poor's price deck of $85/barrel WTI crude oil and $2.00/Mcf Henry Hub natural gas.) We believe the financing will include some portion of debt. Although covenants on Venoco's existing credit facility require the company to maintain leverage below 4x, we believe a new or amended facility could be put in place following the capital restructuring. The buyout proposal has received the required shareholder approval (a majority of the remaining 49.7% shareholders voted in favor). It is subject to customary regulatory approvals and a financing condition. Assuming the required approvals are received, we expect closing to occur shortly after acceptable financing is obtained. CreditWatch Depending on how the buyout proposal is ultimately structured, we could lower the corporate and issue-level ratings if leverage exceeds 5x. Standard & Poor's intends to resolve the CreditWatch listing once it obtains details regarding financing of the buyout deal, likely by the end of July 2012. Related Criteria And Research -- Standard & Poor's Lowers Its U.S. Natural Gas Price Assumptions; Oil Price Assumptions Are Unchanged, April 18, 2012 -- Standard & Poor's Raises Its Oil Price Assumptions; Natural Gas Price Assumptions Unchanged, March 22, 2012 -- Key Credit Factors: Global Criteria For Rating The Oil And Gas Exploration And Production Industry, Jan. 20, 2012 Ratings List Ratings On Watch Negative Venoco Inc. Corporate Credit Rating B/Watch Neg/-- Venoco Inc. Senior Unsecured B-/Watch Neg Recovery Rating 5 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings referenced herein can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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