Washington (Platts)--12Sep2007

Sinking natural gas prices, ambitious drilling programs and an increase
in master limited partnerships could raise concerns about the credit quality
of US gas production companies in the coming year, Standard & Poor's said
Wednesday.

     "Prices continue to be volatile--for example, they rose to around $7/Mcf
equivalent in late August on fears that Hurricane Dean could interrupt Gulf of
Mexico production and promptly fell to nearly $5/Mcfe when those fears proved
to be overblown," S&P credit analysts Andrew Watt said. S&P, like Platts, is a
unit of The McGraw-Hill Companies.

     "If relatively mild weather and an uneventful hurricane season persist,
then natural gas storage levels could rise and further pressure prices," he
said, adding that many exploration-and-production companies have hedged
against a falling market.

     Meanwhile, "turmoil in the credit markets and rising investor concerns
about liquidity and underlying credit quality will limit access to capital
markets for some issuers," according to Watt. But because few E&P firms use
debt to finance their short-term financial needs, the current scarcity of
lenders in the short-term corporate paper market should have little effect on
gas and oil producers, Watt added.

     On the whole, S&P said credit is improving among E&P companies, with
credit upgrades outnumbering downgrades by a two-to-one margin in the first
eight months of 2007 as high oil prices and improved operating performances
outweighed sliding gas prices.

     But weak gas prices will make it harder for some producers--particularly
speculative-grade companies--to improve their ratings, S&P cautioned.

     "Natural gas prices are our biggest concern," Watt said. "Pricing
differentials in the Rockies region remain particularly stark. If prices in
general stay in the area of $5/Mcf over the next several months, we would
expect that investment-grade E&P companies would still generate satisfactory
returns, and that many B and some BB rated natural gas producers could
struggle to replicate the solid operating and financial performance of the
past few years."

     Another obstacle to improving credit quality is the trend toward putting
long-lived producing assets into MLPs separate from the parent company, S&P
said.

     "The credit impact ... will largely depend on the size of the MLP and the
use of proceeds from the MLP formation," Watt explained. "With all other
factors being equal, we would view the formations of the MLPs as detrimental
to credit quality given their untested track record and the significant
commitment of unitholder distributions."

		--Bill Holland, bill_holland@platts.com