CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded Anadarko Petroleum Corporation's (Anadarko; NYSE: APC) Long-term Issuer Default Rating (IDR) and related ratings to 'BBB' from 'BBB-'. Additionally, Fitch has assigned a Short-term IDR and commercial paper rating of 'F2'.
The Rating Outlook is revised to Stable from Positive.
Approximately $12.7 billion of debt, excluding Western Gas, is affected by today's rating action. A full list of rating actions follows at the end of this release.
KEY RATINGS DRIVERS
APC's production size and reserve base rank in the top quartile of independent producers. APC produced 843 mboe/d in 2014, with approximately 49% liquids (oil and NGLs). Fitch expects 2015 production of 812 mboe/d, with the lower total YoY reflecting asset divestitures. APC is expecting production growth in core positions, and grew 2014 U.S. onshore production 16% on a divestiture adjusted basis to 658 mboe/d. U.S. onshore development has focused primarily on the Wattenberg horizontal program, as well as increasing Eagle Ford and Marcellus production.
APC has consistently generated positive full-cycle netbacks ($14/boe in 2014) through a combination of good operating cost control and competitive finding & development (F&D) costs. Full-cycle returns could be challenged in 2015 due to the combination of lower oil & natural gas prices, but APC should be able to realize some cost savings through service cost reductions, which will lower the overall impact on cash flow.
APC's substantial global asset portfolio allows the company to selectively apply capex to its most economic plays. This is a credit-positive for larger E&P companies in times of commodity price weakness, as the company can defer a portion of long-term capex dollars while maintaining production growth by allocating capital to short-term, high rate-of-return projects. APC's land grant position in the Rockies creates superior economics relative to competitors and creates additional opportunities for the company to invest through commodity cycles in its best positions.
RESOLUTION OF TRONOX LITIGATION
In Jan. 2015, APC remitted a final Tronox settlement payment of $5.2 billion. Uncertainty on ultimate liability and size of the cash payment had been a significant credit negative in previous reviews. Through the settlement payment, all claims have been resolved and the injunction is final and non-appealable. Resolution and completion of payment has significantly improved APC's overall credit profile.
RECENT FINANCIAL PERFORMANCE
Performance for the period ending Dec. 31, 2014 was strong. APC generated $10.4 billion in EBITDA, leading to consolidated leverage of 1.4x. Consolidated free cash flow was negative $1.7 billion, which includes capital spending at Western Gas that is consolidated into APC results. Fitch makes adjustments to consolidated APC metrics to reflect the different cash flow profiles of APC and WES, and expects to rate APC based primarily on its deconsolidated credit profile.
Fitch expects that deconsolidated leverage at APC will increase in 2015, primarily due to lower oil and natural prices. Concerns about higher leverage are offset by the company's financial flexibility, size and scale, and overall asset quality relative to peers. Fitch does not expect material increases in debt at the APC level. Total consolidated balance sheet debt at Dec. 31 2014 was $15.1 billion, including $2.4 billion of debt at WES. As calculated by Fitch, Debt/1P was $4.4/boe and debt/flowing barrel was $15,029, down from $4.9/boe and $17,600, respectively, in 2014. Upstream credit metric calculations exclude WES debt.
GOOD LIQUIDITY POSITION INTO DOWNTURN
Pro forma for the Tronox payment, the company had $2.1 billion in cash and $5 billion undrawn on its credit facilities leading to $7.1 billion in liquidity. APC's strong liquidity position allows the company to invest through the cycle, which is characteristic of higher quality E&Ps. APC's financial performance has significant sensitivity to oil and gas prices, and any uptick in oil and gas prices will have a material positive impact on financial results and cash flow.
APC's near-term maturities are manageable. Fitch believes the company will refinance upcoming maturities given the low interest rate environment. Covenants are light and include maintenance of consolidated debt to capitalization of less than 65%.
COMPANY STRENGTHS OFFSET COMMODITY WEAKNESS
As a large independent E&P, APC tends to run a mostly unhedged portfolio, which increases cash flow sensitivity to changes in oil & gas prices, particularly given the large production base. In Fitch's stress case, we assume capex dollars are allocated to short-cycle and a portion of mid-cycle spending is cut, which allows APC to maintain current production at the expense of some longer horizon projects that may be uneconomic at stress pricing. Fitch expects that any deterioration in APC credit metrics will be primarily price driven and not out of line with changes across the investment-grade E&P space.
WESTERN GAS ENHANCES FINANCIAL FLEXIBILITY
Fitch views the relationship between APC and WES/WGP as a credit positive. WES and WGP remain as significant funding levers, allowing APC to retain control over midstream operations but fund organic growth and dropdowns with newly issued MLP capital. Dropdowns also provide a meaningful source of liquidity for the parent. APC retains a significant economic interest through its GP and LP interests in WGP and WES. Fitch expects APC and WES to continue dropdowns at a moderate pace in 2015.
KEY ASSUMPTIONS: BASE CASE FORECAST
--Fitch price deck (WTI) of $50/bbl in 2015, $60/bbl in 2016, and $75/bbl long term
--Global production grows at 3% CAGR, with a moderate tilt towards increasing liquids production (~53%)
--2015 consolidated capex of $6.5 billion. Capital spending in out years is increased in line with increases in Fitch's oil and gas price deck
--Modest service cost reductions of 8% in 2015, driven by lower lease operating expenses. Modest increases in out years are driven by increased activity levels
--WES continues to fund organic growth and asset dropdowns at ~50/50 debt/equity.
--APC maturities are refinanced at market rates.
RATING SENSITIVITIES
Positive: Future developments that may lead to positive rating actions include:
--Maintenance of a large, diverse resource base, with selective funding of core asset development and long term projects in light of changes in oil and natural gas prices;
--Some combination of the following metrics;
--APC debt/EBITDA (excluding the effects of consolidated WES debt and EBITA) approaching 1.25x;
--Debt/1P sustained under $5.00/boe;
--debt/flowing barrel of $12,500-$15,000;
Fitch views positive rating actions as a possibility over the medium-term. Positive rating actions will be linked to the company's ability to balance current production with investments related to future growth during the downcycle, in addition to maintaining adequate financial flexibility for the category.
Negative: Future developments that could lead to negative rating action include:
--APC Debt/EBITDA sustained above 2.5x ;
--Debt/1P approaching $6.0- $7.0/bbl;
--Debt/flowing barrel above $17,500-$20,000;
--Opportunistic leveraging acquisitions leading to out-of-category credit metrics.
Fitch believes that APC's asset quality, resource size, and strong track record of execution and reserve replacement make near-term negative rating actions unlikely.
Fitch has taken the following rating actions:
Anadarko Petroleum Corp.
--Long Term Issuer Default Rating (IDR) upgraded to 'BBB' from 'BBB-';
--Senior unsecured notes upgraded to 'BBB' from 'BBB-';
--Senior unsecured credit facility assigned 'BBB';
--Short Term Issuer Default Rating assigned 'F2';
--Commercial Paper assigned 'F2';
After the Tronox settlement, APC's senior secured revolver was terminated. Fitch has withdrawn ratings on the secured facility.
Kerr-Mcgee, Inc.
--Issuer Default Rating (IDR) upgraded to 'BBB' from 'BBB-';
--Senior unsecured notes upgraded to 'BBB' from 'BBB-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Fitch Oil and Gas Assumptions Summary' (Feb. 11, 2015);
--'Production Sharing Contracts; Countercyclicality Supports Debt in a Low Oil Price Environment' (Jan. 28, 2015);
--'E&P Borrowing Base Redeterminations: History Suggests Lenders May Go Easy in a Downturn' (Dec. 5, 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);
--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);
--'Global Impact of US Shale Oil - Rising Production Tempers World Prices' (Feb. 10, 2014).
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981382
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