TEXT-S&P keeps Venoco ratings on watch negative

Fri Jul 6, 2012 9:53pm IST

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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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