Fitch Ratings has assigned a 'BB+' rating to Newfield Exploration Co.'s
(Newfield; NYSE: NFX) issuance of $500 million senior unsecured notes
due 2026. The company intends to use the net proceeds along with cash on
hand or borrowings under its revolving credit facility to redeem the
$700 million 6.875% senior subordinated notes due 2020. The planned debt
repayment should result in the elimination of the final tranche of
outstanding senior subordinated notes. A full list of ratings follows at
the end of this release.
KEY RATING DRIVERS
Newfield's ratings reflect the company's liquids-focused production
profile and proved reserves base, strong reserve replacement history,
adequate liquidity and favorable hedging position, and credit-conscious
financial policy. These considerations are offset by the company's
heightened execution risk given the relatively early development stage
of and higher capital allocation towards the SCOOP/STACK position (70%
of planned capital expenditures). Fitch recognizes, however, that
results from the STACK have been encouraging with strong growth
potential from multiple, oil-weighted stacked intervals with
opportunities to improve economics through production efficiencies.
The company reported net proved reserves of 645 million barrels of oil
equivalent (MMboe) and production of 135 thousand boe per day (Mboepd),
excluding about 6 Mboepd from discontinued operations in Malaysia and
natural gas produced and consumed in operations, for the year-ended
2014. This results in a reserve life of over 13 years. The
Fitch-calculated one-year organic reserve replacement rate was 250% with
an associated finding and development (F&D) cost of $16.25 per boe.
Credit metrics strengthened year-over-year due to strong operational
performance and the application of Granite Wash divestiture proceeds to
the repayment of the $600 million 7.125% senior subordinated notes. The
Fitch-calculated debt/EBITDA, debt/1p reserves, and debt/flowing barrel
were approximately 2x, $4.50/boe, and $21,100, respectively, for 2014.
These metrics are generally consistent with or better than similarly
rated North American E&P peers. Fitch's base case, assuming a West Texas
Intermediate (WTI) price of $50, forecasts pro forma debt/EBITDA of over
1.6x in 2015.
SHIFTING FROM GROWTH TO RETURNS IN WEAK PRICE ENVIRONMENT
Newfield, consistent with other North American independent E&P peers,
has shifted its focus from a robust three-year production (10%-15%
annually) and cash flow (about 20% per year) growth plan to optimizing
returns and capital efficiency by high-grading drilling activity. The
company has budgeted about $1.2 billion, a roughly 40% year-over-year
reduction, in capital spending savings mainly attributable to a
temporary suspension of drilling activity in the company's Uinta and
Eagle Ford acreage and reduction in rigs operating in its Williston play
(1 rig in 2015 from 4 rigs in 2014). Approximately 70% of the capital
budget is allocated to the SCOOP/STACK. Total production, adjusted for
asset sales, is expected to increase 18% year-over-year (146 mboepd).
This considers a relatively flat North American production profile and
the commencement of the Pearl development in China resulting in
year-over-year fourth-quarter production up 7%.
FINANCIAL MANAGEMENT MODERATES CREDIT RISKS
The company continues to take steps to improve its financial profile
through the downcycle via a recent equity offering, the sale of non-core
assets, and active debt management. Management intends on balancing
capital spending with cash flows in order to preserve liquidity and
maintain a strong balance sheet through the downcycle. However, Newfield
indicated that supportive pricing signals could lead to an acceleration
of drilling activity and it continues to be opportunistic in its pursuit
of 'bolt-on' acreage, particularly for its Anadarko Basin position.
Fitch's base case, assuming a WTI price of $50, projects that Newfield
will exhibit a free cash flow (FCF) neutral profile in 2015. The Fitch
base case results in pro forma debt/EBITDA of over 1.6x in 2015. Pro
forma debt/1p reserves and debt per flowing barrel metrics are forecast
to improve to approximately $3.25/boe, subject to any revisions, and
$15,750, respectively. Fitch's base case WTI price forecast assumption
of $60 in 2016 and $75 long-term suggests that Newfield may selectively
increase drilling activity in 2016. The Fitch base case considers that
the company will maintain capital spending within operating cash flows
in 2016 resulting in a pro forma debt/EBITDA of nearly 1.8x.
Newfield maintains a rolling, multi-year hedging program, using a
combination of swaps and three-way collars, to manage cash flow
variability and support development funding. Fitch recognizes that the
company's three-way collar hedging strategy provides some upside
potential, but exposes cash flows to adjusted spot prices in a weak
pricing environment. As of Feb. 20, 2015, Newfield's oil production was
over 80% hedged for both 2015 and 2016.
ADEQUATE LIQUIDITY POSITION
Newfield has historically maintained a nominal cash balance. As of Dec.
31, 2014, the company had $14 million in cash and cash equivalents. The
company's primary source of liquidity is the recently upsized and
extended $1.8 billion senior unsecured credit facility due June 2020.
The revolver has no outstanding borrowings following the application of
the majority of proceeds from Newfield's $815 million (net) Feb. 26,
2015 equity offering.
The company has an extended maturities profile with its next senior
unsecured debt maturity in 2022. Financial covenants, as defined in the
credit facility agreement, consist of a maximum debt-to-book
capitalization ratio of 60% and an EBITDAX/interest expense ratio of at
least 3x. Other covenants across debt instruments restrict the ability
to incur additional liens, engage in sale/leaseback transactions, and
merge, consolidate, or sell assets, as well as change in control
provisions. The company is in compliance with all of its covenants with
ample cushion.
MANAGEABLE OTHER LIABILITIES
Newfield does not maintain a defined benefit pension plan. Asset
retirement obligations (AROs) increased to $186 million in 2014 from
$122 million in 2013 principally due to the addition of AROs related to
the Pearl development in China ($28 million) and U.S. onshore well
growth ($30 million). Other contingent obligations totaled $832 million
on a multi-year, undiscounted basis comprising firm transportation
agreements ($389 million) and operating leases and other service
contracts ($443 million).
Additionally, the company entered into oil and gas delivery commitments
for a total of nearly 125 MMboe between 2015 and 2025. The majority of
these delivery commitments are associated with its Tesoro and
HollyFrontier refinery arrangements to accommodate the company's waxy
Uinta production. Management believes its reserves and production will
be sufficient to meet these commitments. Further, Fitch understands that
annual deficiency fees, assuming current production relative to the
maximum delivery commitment, would be manageable at about $10 million
per year for 2015-2016 and approximately $40 million per year thereafter.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
--WTI oil price that trends up from $50/barrel in 2015 to $60/barrel in
2016 and a long-term price of $75/barrel;
--Henry Hub gas that trends up from $3/mcf in 2015 to $3.25/mcf in 2016
and a long-term price of $4.50/mcf;
--Production growth of less than 15% in 2015, generally consistent with
guidance, followed by modestly lower production with an uptick in the
production profile thereafter;
--Liquids mix increases to 63% in 2015 with the heightened production
growth in the Anadarko Basin and commencement of operations in China
with a continued focus on liquids thereafter;
--Capital spending is forecast to be $1.2 billion in 2015, consistent
with guidance, followed by a balanced capital spending program until
market prices are supportive of longer term production growth and cash
flow outspend;
--Retention of the China operations.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively,
lead to a positive rating action include:
--Increased size, scale, and diversification of Newfield's operations
with some combination of the following metrics;
--Mid-cycle debt/EBITDA below 2x on a sustained basis;
--Debt/flowing barrel under $20,000 and/or debt/1p below $5.50/boe on a
sustained basis.
Fitch does not anticipate a positive rating action in the near term
given the current weak pricing environment. However, continued
operational execution and a clear path to core production and reserve
base growth, while maintaining financial flexibility, could lead to a
positive rating action over the medium-term.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
--Mid-cycle debt/EBITDA above 2.5x on a sustained basis;
--Debt/flowing barrel of $25,000 - $30,000 and/or debt/1p above $7/boe
on a sustained basis;
--A persistently weak oil & gas pricing environment without a
corresponding reduction to capex;
--Acquisitions and/or shareholder-friendly actions inconsistent with the
expected cash flow and leverage profile.
Fitch does not expect a negative rating action in the near term given
the steps taken by management to pay down debt and balance capital
spending with cash flows. However, Fitch recognizes that a large
leveraging transaction and/or acceleration of drilling activity without
a supportive hedge position/market pricing outlook could reduce
financial flexibility and, potentially, pressure the rating.
Fitch's ratings for Newfield are as follows:
Newfield Exploration Co.
--Long-term Issuer Default Rating 'BB+';
--Senior unsecured bank facility 'BB+';
--Senior unsecured notes 'BB+';
--Senior subordinated notes 'BB'.
The Rating Outlook is 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' (May 28, 2014);
--Fitch Oil and Gas Assumptions Summary Feb. 2015 (Feb. 11, 2015);
--U.S. Rig Counts Under Pressure (Downcycle to Fewer than 1,000 Rigs
Followed by Longer, Slower Recovery) (Feb. 5, 2015);
--'Shale and North American Energy (European Investor Tour)' (Oct. 23,
2014);
--'Full Cycle Costs for North American E&P (Production Costs Moderate in
2013)' (July 30, 2014);
--'North American Energy Outlook and LNG' (July 16, 2014);
--'North American Exploration and Production Handbook' (July 16, 2014);
--'Global Impact of US Shale Oil - Rising Production Tempers World
Prices' (Feb. 10, 2014);
--'Cash Flow Trends in the U.S. Energy Sector-Shareholder Activism
Having an Impact' (Feb. 4, 2014);
--'Scenario Analysis: Lifting the U.S. Crude Export Ban' (Jan. 27, 2014).
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=749393
Fitch Oil and Gas Assumptions Summary Feb 2015
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862009
U.S. Rig Counts Under Pressure (Downcycle to Fewer than 1,000 Rigs
Followed by Longer, Slower Recovery)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861552
Shale and North American Energy (European Investor Tour)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=801728
Full Cycle Costs for North America E&P (Production Costs Moderate in
2013)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753198
North American Energy Outlook and LNG
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751784
North American Exploration and Production Handbook
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749557
Global Impact of U.S. Shale Oil (Rising Production Tempers World Prices)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735415
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980799
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