Fitch Ratings has affirmed Hess Corporation's (Hess; NYSE: HES) Issuer
Default Rating (IDR) and related ratings at 'BBB'. The Rating Outlook is
Stable.
Approximately $6.2 billion in debt is affected by today's rating action.
A full list of ratings is at the end of this release.
Key Ratings Drivers
Hess' ratings are supported by the company's strong operational metrics,
including high exposure to liquids in the upstream (approximately 75% of
2012 production and reserves); decent size and scale as an independent
(1.554 billion boe reserves at YE 2012, with core regions in the US
[GoM, onshore Bakken and Utica], North Sea, Asia-Pacific, and West
Africa); robust full cycle netbacks; and respectable reserve replacement
(3-year organic RR 121%).
As calculated by Fitch, Hess' most recent three-year Finding,
Development & Acquisition (FD&A) costs rose to $29.94/boe. However,
these costs were elevated due to the company's infrastructure spending
in the Bakken, which raises long-term profitability of produced barrels
but does not necessarily increase current year reserves. Fitch expects
FD&A/boe metrics will trend significantly lower as these investments
wind down, and as increased drilling efficiencies continue to be
realized in the Bakken. The company has also repaid a significant amount
of debt with asset sales proceeds, with debt at June 30, 2013 falling to
$5.8 billion ($6.2 billion at Sept. 30, 2013) versus a high-water mark
of $8.11 billion at YE 2012.
Ratings downsides for Hess include the loss of diversification benefits
associated with the downstream and retail assets; some loss of size
primarily through upstream asset sales (Q3 production was 310,000 boepd
vs. 402,000 boepd a year ago); and the tail risk of further activist
shareholder pressure for the company, particularly if Hess were to
encounter a period of sustained low oil prices or weak execution in key
plays.
Asset Sales to Fill the Gap
Hess has used asset sale proceeds to close its funding gap, and the plan
has proceeded at or above targets. Year-to-date, Hess has completed or
neared completion on six of its 10 announced divestitures, with proceeds
and release of working capital totaling $6.3 billion. Pending sales
include the company's oil & gas properties in Indonesia and Thailand,
its energy trading operations, and the spin-off or IPO of its retail
filling station network on the east coast. If retail is spun-off rather
than sold, Fitch anticipates that would count as part of the company's
$4.0 billion share buyback program. Hess' publicly stated priority for
uses of cash continues to be 1) repayment of debt 2) creation of a $1
billion cash cushion 3) funding 2013 cash flow deficits 4) share
repurchases.
Less Negative FCF Trend
Hess' FCF status has improved as it nears the end of a multi-year
investment in shale plays. LTM FCF at June 30, 2013 was -$1.67 billion,
a reduction from the -$2.31 billion in FCF seen in 2012 as the company's
LTM capex fell to $6.92 billion versus approximately $8 billion in 2012.
Further improvements are expected in 2014 as the company completes
one-time infrastructure spending in the Bakken (Tioga gas plant
expansion, rail loading facilities, gathering and transmission lines
etc), and capex associated with sold assets rolls off. 2014 capex is
expected to decline to below $6 billion. Fitch anticipates the company
will be modestly FCF negative in 2014 (approximately -$500 million in
our base case). Hess has reasonable levels of capex flexibility in its
exploration program of the Utica shale given that its joint venture
partner CONSOL holds all of its acreage by production.
Bakken Performance Improving
After an earlier period of flat performance, Bakken metrics have begun
to improve. The company has now largely exited its leasehold drilling
program and has been doing higher efficiency pad drilling. Well
completion costs have declined to $7.8 million/well, down 18% from year
ago levels, and production has risen to 71,000 boepd, up 14% from year
ago levels. Fitch anticipates additional downspacing opportunities mean
the company is likely to exceed its previous 120,000 boepd long term
guidance. Strong operational performance in the Bakken is especially
important as it would tend to put to rest operational complaints made by
shareholder activists in the most recent proxy season.
Financial Performance
Hess' latest financial performance has been good, driven by a very
robust oil pricing environment. At September 30, 2013, Hess generated
EBITDA of $7.49 billion. Given the company's significant debt pay down
($6.21 billion versus $8.111 billion at YE 2012), debt/EBITDA declined
to just 0.83x, while EBITDA/gross interest stood at 16.6x. The company
bought back approximately $500 million in shares in the third quarter,
funded by an increase in revolver debt. While Hess may allow revolver
balances to drift up somewhat over the next few quarters to fund its
buyback program, Fitch anticipates that these will quickly be paid down
as asset sale proceeds are received.
Liquidity
Hess maintains liquidity through a $4 billion committed bank facility
maturing in 2016; a $1 billion ARS facility (cancelled in Q3);
approximately $2.4 billion in other committed lines; and cash. Excluding
cash and equivalents of $725 million at June 30, 2013, total liquidity
across all of Hess' facilities was $6.27 billion. Hess' main financial
covenant is a maximum debt-to-capitalization ratio of 62.5% contained in
its revolver, vs. an actual ratio of 19.5% at June 30, 2013 (20.7% at
Sept. 30, 2013). There are no financial covenants beyond the debt-to-cap
covenant contained in the revolver. Other non-financial covenants
contained in the bond indentures include restrictions on mergers and
asset sales, limitations on sale leasebacks and cross default
provisions. Hess' maturity schedule is manageable, and includes $250
million due in 2014, and no other major maturities due until 2019.
Other Obligations
Hess' other obligations are manageable. The company's pension was
under-funded by $347 million at YE 2012 versus $373 million at YE 2011,
but this gap is manageable when scaled to underlying FFO. Expected
pension contributions for 2013 are $140 million. Fitch expects that
recent asset sales, including the complete exit from the downstream, are
likely to reduce this in the future. Hess has historically carried a
large LoC position primarily linked to its energy marketing arm ($593
million outstanding at June 30, 2013). None of the LoCs were drawn from
the company's main revolver. Fitch anticipates that this requirement
will largely go away once Hess completes its exit from the downstream
and energy marketing. At June 30, 2013, if the company were to be
downgraded below Investment Grade, it would be required to post an
additional $145 million in collateral to satisfy existing derivative
positions. Hess' Asset Retirement Obligation (ARO) stood at $1.97
billion at June 30 2013, vs. $2.12 billion at YE 2012.
Ratings Sensitivities
Positive: Future developments that could lead to positive rating actions
include:
--Increased size, scale and diversification of Hess' upstream portfolio,
accompanied by a managerial commitment to maintaining lower debt levels
relative to reserves and production. Positive rating actions are
unlikely in the current period given the high capex and restrained
reserve and production growth associated with Hess' portfolio
repositioning.
Negative: Future developments that could lead to negative rating action
include:
--Failure of stated asset sales to close as expected;
--A prolonged period of weak operational performance or low oil prices;
--The sale or spin-off of assets beyond levels originally outlined
without offsetting adjustments;
--A major negative reserve revision; or loss at the company's energy
trading operations.
Fitch affirms Hess' ratings as follows:
--Long-term IDR at 'BBB';
--Senior unsecured notes/debentures at 'BBB';
--Senior unsecured bank facility at 'BBB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology Including Short-Term Ratings and Parent
and Subsidiary Linkage' (Aug. 5, 2013);
--'Crossover Credits in Natural Resources - Migration Catalysts
2003-2013' (Oct. 31, 2013);
--'Full Cycle Cost Survey for E&P Producers-2012 Numbers Up, but
Adjustments Tell a Different Story' (May 28, 2013);
--'Investor FAQs--Recent Questions on E&P, Refining, and Drilling and
Services Sectors' (Aug. 12, 2013);
--'Updating Fitch's Oil & Gas Price Deck' (July 29, 2013);
--'Energy Handbook--Upstream Oil & Gas' (June 28, 2013);
--'Dividend Policy in the Energy Sector - Low Oil Prices Could Create
Cash Flow Stress' (Feb. 29, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Crossover Credits in Natural Resources -- Migration Catalysts 2003-2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721741
Full Cycle Cost Survey for E&P Companies (2012 Numbers Up, but
Adjustments Tell a Different Story)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708783
Investor FAQs: Recent Questions on the E&P, Refining, and Drilling and
Services Sectors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715859
Updating Fitch's Oil and Gas Price Deck
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714596
Energy Handbook -- Upstream Oil & Gas
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706481
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=808397
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