S&P Afms Rtgs on KCS Energy Inc.;Outlk Now Stable.

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire 8/17/98--Standard & Poor's today affirmed its single-'B'-plus corporate credit rating on KCS Energy Inc., its single-'B' rating on the company's $150 million 11% senior notes due Feb. 15, 2003, and its single-'B' minus rating on the company's $125 million subordinated notes due Jan. 15,2008. The outlook has been revised to stable from positive.

The ratings on KCS Energy Inc. reflect its position as an independent exploration and production company with a small reserve base, relatively high finding costs, and an aggressive capital structure. Following the early termination (in December 1996) of its above-market, take-or-pay gas contract, KCS has successfully diversified its reserve base beyond the Bob West Field (Texas). The company's operations are now primarily in the U.S. mid-continent, onshore Gulf Coast, and the Rocky Mountain region.

A large inventory of relatively low-risk drilling prospects and a fair drilling track record give credence to the company's ability to grow through internal development, supplemented by moderate acquisitions, in the next several years. Still, the pace of internal growth is currently being affected by generally depressed energy markets. In particular, the focus on developing the Manderson Field (Wyoming), has now shifted to reducing expenses.

A short reserve life (about seven years) gives rise to high reinvestment risk, although this is partially driven by the extremely short reserve lives characteristic of KCS' volumetric production program (VPP) transactions, under which the company buys a fixed production stream at a predetermined price.

Price risk associated with the VPP purchases is partly mitigated by currently large margins and its active hedging program.

Over the next few years, Standard & Poor's expects KCS to incur additional debt to fund planned capital spending in excess of cash flow. Still, given KCS' better-than-average operating cost structure and the fast-producing nature of its reserves, cash flow protection is expected to be fair for the rating category, with funds from operations to total debt likely to be in the mid-20% area, and earnings before interest, taxes, depreciation, and amortization interest coverage about 3 times (x).

The capital structure is expected to remain aggressive. Recent write-downs in the value of reserves -- driven by currently depressed prices-have resulted in an increase in total debt-to-capitalization to close to 80%. While the write-downs have no impact on cash-flow, they nonetheless point to the erosion in the economics of the company's production should prices remain at current levels for an extended period.

OUTLOOK: STABLE

In time, the company's internal development opportunities could drive higher production levels, further reduction in the company's higher-than-average finding costs, as well as an improved financial profile. Still, currently adverse pricing conditions slowing down the pace of internal reserve development limit the possibility of a ratings upgrade in the next several years. -- CreditWire

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