Fitch Affirms Pan American Energy LLC at 'BB-' and its Argentine Branch at 'AAA (arg)

BUENOS AIRES, Argentina--(BUSINESS WIRE)--Fitch Ratings has affirmed Pan American Energy LLC's (PAE) foreign currency Issuer Default Rating (IDR) and the international debt issuances of Pan American Energy LLC Sucursal Argentina (PAME) at 'BB-'. Fitch has also affirmed the local currency IDR of PAE at 'BB'. In addition, Fitch has affirmed the national long-term rating of PAME and its debt issuances at 'AAA (arg)'. The rating actions affect USD750 million of issued debt.

Below is a detail of Fitch's rating actions on PAME's debt instruments; fully guaranteed by PAE:

--USD250 million 2012 notes affirmed at 'BB-';

--USD500 million 2021 notes at 'affirmed at BB-'.

The Rating Outlook for all ratings is Stable.

PAE's ratings are supported by the company's long-lived reserve base and solid credit metrics. The two-notch foreign currency IDR above the country ceiling of Argentina is supported by PAE LLC's reliable strong cash flow generation, high level of dollar-denominated export revenues relative to total debt which mitigates its exposure to currency mismatch, and its ability to maintain up to 70% of export revenues offshore which mitigates transfer and convertibility risk. PAE exports totaled USD2.1 billion in 2010 and favorably compares to long-term debt maturities of USD288 million in 2011. In addition, the company has a track record of payment during stressed sovereign scenarios.

The ratings are tempered by PAE's exposure to local political interference, inflation pressures on its cost structure and the potential incremental leverage following the acquisition of BP's stake in PAE by Bridas, which could increase the burden on PAE's future cash flow. However, mitigants to this situation include PAE's ample liquidity and its proved access to the financial markets.

PAE's Outlook remains Stable. The company's Outlook could be revised to Negative if credit metrics sharply deteriorate due to a combination of a reduction in cash generation due to rising costs and debt funded dividends. A revision to a Positive Outlook is rather unlikely given its linkage to the country ceiling of Argentina and the expectation of higher leverage.

In 2010, PAE's EBITDA was USD1,435 million, slightly below the USD1,487 million in 2009. The reduction is mostly attributable to a delay in receiving tax certificates from the government to be used to pay for a portion of the export tariffs. Fitch expects EBITDA will remain within current levels as moderate expected increases in production levels could potentially be compensated with a higher cost structure due to growing inflation and personnel expenses.

PAE's leverage is expected to increase as a result of Bridas' acquisition of BP's stake in the company. On a pro forma basis, total consolidated debt including PAE's and Bridas' could climb to approximately USD4 billion, and would result in a consolidated debt to EBITDA ratio near 2.7 times (x) and a debt to proved reserves of USD3 per barrel of oil equivalent (boe). As of December 2010, PAE had a debt to EBITDA ratio of 1.3x and a debt to proved reserves of USD1.3 per boe. Given the fact that PAE's current ratings ('BB-' foreign currency IDR) have been constrained by the operating business environment in Argentina, the new credit metrics will most likely be acceptable for the current rating level. However, Fitch will monitor the terms and conditions of the incremental leverage upon its closing and asses its impact in PAE's cash flow burden, including its annual capex and debt service.

As of December 2010, PAE had a good liquidity position of USD420 million with long-term debt maturities of USD288 million in 2011 (of which USD123 million was paid last February), USD388 million in 2012 and USD253 million in 2013.

PAE is the second largest producer of oil and gas in Argentina, accounting for approximately 17% of domestic 2010 production. PAE, a company incorporated in the United States, is currently 40% owned by Bridas Corporation (Bridas) which is in the process of acquiring BP's remaining 60% stake in the company. The transaction is subject to regulatory and governmental approval and is expected to close during the first half of 2011. The acquisition excludes Pan American's assets in Bolivia. Bridas is 50% owned by Bridas Energy Holdings Ltd (BEH) and 50% by China National Offshore Oil Corporation Limited (CNOOC, rated 'A' by Fitch).

Additional information is available at 'www.fitchratings.com'.

The rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com':

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', dated Aug.13, 2010;

--'Rating Oil and Gas Exploration and Production Companies', dated April 6, 2010;

--'Rating Corporates Above the Country Ceiling', dated Aug. 8, 2005.

For additional information on Bridas' acquisition please see 'Fitch: Sale by BP Leveraging for PAE; PAE's Ratings Unlikely to Be Affected', dated Nov. 30, 2010; and 'Fitch: No Formal Obstacles to Potential BP Sale of Pan American Energy' dated July 13, 2010.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Rating Corporates Above the Country Ceiling

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=594985

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