S&P rates Milagro notes B-

Standard & Poor's said it assigned a preliminary B- corporate credit rating to Milagro Oil and Gas Inc. and a preliminary B- issue rating and 4 recovery rating to the company's planned $250 million of senior secured second-lien notes due 2016. The recovery rating indicates average (30% to 50%) recovery.

The outlook is negative.

Proceeds from the planned note offering will be used to repay existing second-lien debt and to partially repay outstanding amounts under the existing first-lien revolving credit facility.

The ratings on Milagro reflect the company's relatively small asset base and production levels, significant exposure to natural gas prices, historically weak reserve replacement metrics and high leverage, the agency said.

The ratings also reflect the company's decent reserve life metrics relative to other onshore Gulf based exploration and production companies and a liquidity position which should enable the company to fund planned 2011 capital expenditures and bolt-on acquisitions, the agency added.

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