S&P cuts Encore view to negative

Standard & Poor's said it affirmed Encore Acquisition Co.'s BB- corporate credit and B subordinated debt ratings and revised the outlook to negative from stable.

The negative outlook primarily reflects the increase in financial leverage incurred to fund Encore's $400 million cash acquisition of oil- and gas-producing properties in the Big Horn Basin in Wyoming, the agency said. The cost of $20 per proved barrel of oil equivalent is high, reflecting the current high commodity price environment, and the purchase price raises debt leverage to about $5.00 per barrel of oil equivalent, which is elevated relative to similarly rated peers.

S&P noted that Encore is hedging a significant percentage of expected production from the acquired properties at favorable prices, which partially offsets the high cost of the transaction.

The ratings on Encore reflect a weak business risk profile, incorporating participation in the competitive, capital-intensive and highly cyclical oil and gas industry, and an aggressive financial risk profile, the agency said. Pro forma for the Big Horn acquisition, Encore's total debt-to-EBITDAX (which excludes exploration expenses) ratio will be around 2x.

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