Standard & Poor's also placed its 'A-1' short-term and 'A-' subordinated debt ratings on OIL on CreditWatch with negative implications.
"This action reflects Standard & Poor's concern with OIL's potential exposure to Hurricane Katrina, which is believed to have caused substantial damage to oil, gas, and energy operations in the areas affected by the hurricane, particularly in Louisiana and Mississippi," explained Standard & Poor's credit analyst Laline Carvalho. "These potential losses follow one of OIL's worse operating years in 2004, in which a combination of $397 million in losses from Hurricane Ivan, a total limit-loss of $250 million due to an explosion of a large gas platform in the Mediterranean Sea, and loss reserve increases related to prior year claims led the company to report a net loss of $548 million for the year."
As a consequence of the unfavorable results in 2004, OIL's year-end 2004 capital adequacy was below Standard & Poor's long-term expectations for the company, reflecting a decline in OIL's GAAP shareholders' equity base to $994 million, compared with $1.5 billion at year-end 2003. Although OIL's members are contractually obligated to pay for OIL's incurred losses over a five-year period through a unique retrospective rating plan, Standard & Poor's believes a potential large loss from Hurricane Katrina in the context of OIL's weaker capital position since year-end 2004 is likely to place further strain on the company's capital adequacy and weaken its liquidity position. Although it is too early to estimate OIL's actual losses from Katrina, OIL's contractual provisions cap the company's total aggregation limit for any one occurrence at $1 billion.
Standard & Poor's will be meeting with OIL's senior management in the next two to four weeks to discuss the company's estimated losses from Hurricane Katrina, as well as the group's projected capital adequacy position, earnings expectations, and schedule of premium repayments by its policyholders (as per the provisions of the retrospective rating plan) over the short and medium term. The CreditWatch is expected to be resolved in the next four to six weeks, after Standard & Poor's has considered all these factors. At this stage, Standard & Poor's believes that OIL's ratings are unlikely to be lowered by more than one category.
Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.
Media Contact:
Marc Eiger, New York, (1) 212-438-1280
marc_eiger@standardandpoors.com
Analyst Contacts:
Laline Carvalho, New York (1) 212-438-7178
Thomas Upton, New York (1) 212-438-7249
Mohammed Ashab, New York (1) 212-438-1841
Standard & Poor's, a division of The McGraw-Hill Companies (NYSE:MHP), is the world's foremost provider of independent credit ratings, indices, risk evaluation, investment research, data and valuations. With approximately 6,700 employees located in 21 countries and markets, Standard & Poor's is an essential part of the world's financial infrastructure and has played a leading role for more than 140 years in providing investors with the independent benchmarks they need to feel