S&P Afms BB+, BB- Rtgs on Gulf Canada Resources Ltd.
The outlook is stable.
The ratings affirmation follows several credit positive events including the IPO of 28% of Gulf Indonesia Resources and the company's intention to pay preferred dividends in arrears on both its series 1 and 2.
Gulf has made several acquisitions over the past few years expanding geographical diversity and providing a large portfolio of drilling opportunities. Notably, the acquisition of Clyde Petroleum PLC in March 1997 added current production and significant reserves in the North Sea (U.K. and Netherlands), Indonesia, and Australia. Likewise, the August 1997 acquisition of Stampeder Exploration Ltd. strengthened Gulf's position as a leading heavy oil producer in western Canada.
Nonetheless, these improvements in the business risk profile are offset by the company's weaker financial risk profile, particularly Gulf's sizable debt burden and poor profitability. While the refinancing of the Clyde acquisition debt adds credence to management's intention to adhere to prudent financial policies -- including a limited use of debt as a means to fund further acquisitions and capital expenditures -- Gulf's profitability and cash flow measures remain weak relative to those of higher-rated peers. Pretax return on permanent capital is weak at about 6%. Pretax interest coverage and earnings before interest, taxes, depreciation and amortization interest coverage are sub-par, having fallen to 1.2 times (x) and 3.4x respectively. Debt leverage is not expected to increase going forward as total debt to capital will likely remain in the low 50% range over the near-term, declining marginally to the high 40% range beyond 1998.
While the company's financial profile is expected to gradually improve over the next three years owing to increasing production, the attainment of investment grade standards will be hindered by the company's large debt burden and ambitious capital expenditure program. The IPO of Gulf Indonesia resulted in available proceeds to Gulf of US$345 million reducing the Clyde acquisition bank debt to US$338 million from US$1.4 billion in March 1997. In addition, cash proceeds of C$230 million from the recent sale of Western Canadian assets will also be applied against debt. However, these transactions will not have a significant impact on the reduction of total debt, which is expected to remain at about C$2.95 billion (adjusted for capitalized operating leases) at year-end 1997. Going forward, Gulf's capital expenditure program of some C$1 billion per annum will be funded from free operating cash flow thereby siphoning away internal cash flow otherwise available for debt reduction. Standard & Poor's views the elimination of the preferred dividend arrears positively.
Standard & Poor's expects Gulf to continue to make improvements to the company's financial profile. In addition, no further large debt-financed acquisitions are anticipated. The company is also expected to enhance production and reserves from its portfolio of core assets. In particular, Gulf's gas projects in Indonesia are expected to come on stream as scheduled, Standard & Poor's said.--- CreditWire
CONTACT: Christopher Lee, Toronto (1) 416-202-6019
John R Tysall, Toronto (1) 416-202-6008
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|Date:||Nov 6, 1997|
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