Fitch Ratings has affirmed the Issuer Default Rating and senior
unsecured ratings of Apache Corporation (NYSE:APA) at 'BBB+'. In
addition, Fitch has revised the company's Outlook to Positive from
Stable. Ratings for the company's preferreds have been withdrawn.
Approximately $10.93 billion in debt is impacted by today's rating
action.
A full list of ratings follows at the end of this press release.
KEY RATINGS DRIVERS
Apache's ratings are supported by the company's recent debt repayments;
rising exposure to liquids (liquids production reached 55% on a pro
forma basis in Q3, the highest in the company's history); good size and
scale as an independent; strong historical track record as a top
operator in the space; and reduced exposure to politically volatile
Egypt following the sale of a 1/3rd interest in its Egypt operations.
While outside the company's control, persistently high oil prices
(average WTI of approximately $98/barrel and Brent of $109/barrel
year-to-date in 2013) have also been a credit positive.
Credit concerns center on the potential for future prolonged capex
pressure from the company's LNG projects, including its 13% stake in
Wheatstone and the larger potential funding needs associated with its
50% stake in the Kitimat, B.C. export facility, which has not yet
reached FID.
ASSET SALES AND DEBT REDUCTIONS
In 2012, Fitch downgraded APA from 'A-' to 'BBB+' due to a multi-year
trend of debt growing faster than underlying reserves and production,
resulting in higher debt/boe metrics. In the third quarter of this year,
the company began to reverse that trend through asset-sale funded debt
repayments. Year-to-date, the company has sold over $7.0 billion in
assets, and repaid $1.85 billion in debt, bringing its total debt down
to $10.93 billion from $12.78 billion seen the prior quarter, with zero
short-term borrowings outstanding. Fitch anticipates the company is
likely to pay down additional portions of its long term debt as further
asset sale proceeds are received, including the sale of a minority stake
in Egypt to Sinopec, which closed November 14 for proceeds of $2.95
billion.
LOWER ARO
As part of the sale of the GoM shelf to Fieldwood Energy, LLC, APA
exited approximately $1.5 billion in future abandonment liabilities
(asset retirement obligation--ARO). As a result of this sale, APA's ARO
fell from $4.75 billion at June 30, 2013 to $3.26 billion. To the degree
APA's onshore portfolio grows at a faster pace than its offshore
portfolio, Fitch believes growth in APA's ARO liabilities may moderate,
as onshore remediation tends to be less costly than offshore remediation.
GROWING MOMENTUM IN ONSHORE SHALE
Following earlier acquisitions and recent restructuring activity,
onshore shale plays have increased as a percentage of Apache's
portfolio. In Q3 the key driver of production growth in US onshore was
gains in the Permian and Central regions, which saw y-o-y increases of
18% (increasing to 132,000 boepd) and 31% (increasing to 95,000 boepd).
Similar to the pattern seen among other North American E&P firms, we
anticipate the trend of drilling efficiency gains is likely to continue
to provide benefits for APA in the form of improving cash margins,
better unit economics, and higher recoveries.
REDUCED EGYPT FOOTPRINT
The announced sale of the company's 1/3 minority stake of its Egypt
operations to Sinopec for $2.95 billion on November 14 helped to remove
a key overhang on the stock in terms of its exposure to a politically
volatile Middle Eastern country. On a pro forma basis accounting for the
sale, Egyptian production has fallen from 26% of portfolio production in
2009 to just 16% at Sept. 30, 2013.
GOOD FINANCIAL METRICS
Recent LTM financial metrics were good, and include balance sheet
debt/EBITDA of 0.91x (versus 1.01x at YE 2012), FFO interest coverage of
15.6x, and free cash flow of -$1.84 billion. Looking forward, under our
base case assumptions, Fitch expects the company will be meaningfully
FCF negative in 2014 (- $1.5 billion), although we don't expect any
deficits to be debt-funded.
HIGH CAPEX STILL A CONCERN
With regards to future capex pressure, Fitch would note that the
company's LNG projects (the Chevron-operated Wheatstone facility in
Australia, and the Kitimat, B.C. export facility) may create funding
pressures over an extended time frame given the long lag between the
initial investment and cash flows as well as the potential for cost
overruns. With regards to Wheatstone, final investment decision (FID)
was reached by operator Chevron and partners in 2011. Apache's share of
spending for its 13% stake is approximately $4 billion. However, initial
cash flows from the facility are not expected until late 2016. No FID
has been made with regards to Kitimat which makes its status less
certain, but if that project goes ahead, Fitch expects similar or higher
capex requirements given its size and remote location.
Because of their ratable nature, the LNG facilities should lower
Apache's overall cash flow volatility once up and running. However, in
the interim, credit metrics could be challenged as a sponsor must lean
on the remainder of its portfolio to produce supporting cash flows.
Capex pressures on the company could be significant over the near to
medium term.
LIQUIDITY
At Sept. 30, 2013, Apache's liquidity was strong. Cash and equivalents
were $1.25 billion, and given zero CP balances, the company had 100%
availability on its $3.3 billion committed unsecured revolver capacity
for total liquidity of $4.55 billion. Of this, $1.0 billion in capacity
matures in August 2016, and the remaining $2.3 billion matures in June
2017. All revolvers are U.S. dollar denominated facilities which can be
used to backstop Apache's $3.0 billion CP program. Near-term maturities
are moderate and include nothing due 2014, $350 million due 2015, $1
million due 2016, and $900 million due 2017. Covenant restrictions
across Apache's debt instruments are light and include a 60%
debt-to-capitalization maximum across its unsecured revolvers (actual
debt-to-cap of 25% at 9/30/2013), as well as limitations on sale
leasebacks and change of control provisions.
OTHER LIABILITIES
Apache's other obligations are manageable. The deficit on pension
benefit plans at year-end 2012 was just $7 million. The company's Asset
Retirement Obligation (ARO) declined to $3.26 billion at the end of the
third quarter, versus $4.75 billion the prior quarter, due to the sale
of the GoM shelf and transfer of related liabilities with the sale.
Accrued environmental reserves at the end of 2012 were $104 million.
RATINGS SENSITIVITIES
Positive: Future developments that could lead to positive rating actions
include:
--Sustained improvement in debt/boe metrics achieved through a
combination of reductions in long-term debt and growth in reserves and
production; and,
--Other credit supportive actions such as the sale of a meaningful
equity stake in Kitimat to reduce future capex funding pressures or
other commitment to live within cash flow means.
Negative: Future developments that could lead to negative rating action
include:
--Significant additional leverage added to the balance sheet stemming
from expansions in capex; a large leveraging transaction or
transactions; or debt-funded share buybacks;
--A sustained collapse in oil prices without offsetting adjustments;
--A major operational issue or reserve impairment.
Fitch affirms Apache Corporation's ratings as follows:
--Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured credit facility at 'BBB+';
--Senior unsecured notes at 'BBB+'.
--Commercial paper at 'F2';
--Short-term IDR at 'F2'.
The Rating Outlook has been revised to Positive from Stable.
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' (February 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
Dividend Policy in the Energy Sector -- Low Oil Prices Could Create Cash
Flow Stress
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=672197
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=808753
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