Fitch Downgrades Pacific Rubiales to 'B+'; Outlook Negative

NEW YORK--()--Fitch Ratings has downgraded Pacific Rubiales Energy Corp.'s (Pacific Rubiales) foreign and local long-term Issuer Default Ratings (IDRs) to 'B+' from 'BB'. Fitch has also downgraded to 'B+/RR4' from 'BB' its long-term rating on Pacific Rubiales' outstanding senior unsecured debt issuances totalling approximately USD4 billion with final maturities in 2019 through 2025. The Rating Outlook is Negative.

The downgrade reflects Alfa SAB (Fitch IDR 'BBB-'/Outlook Stable) and Harbour Energy Ltd.'s (Harbour Energy) decision to terminate their offer to acquire Pacific Rubiales. This potential acquisition would have provided the company with new shareowners that could have been able to provide the company with a much needed capital in the face of challenging industry conditions. The new shareholder group could have also helped Pacific Rubiales to lower its business risk by facilitating its entrance into Mexico.

Pacific Rubiales is suffering from the negative effect the decline in oil prices has had on its credit profile. Medium and long-term production and reserve replacement will likely be affected by the steep decrease in prices seen since the second half of 2014. This in turn will force Pacific Rubiales to reduce capital expenditures significantly. Pacific Rubiales' credit metrics will also deteriorate in 2015 and 2016; leverage, as measured by total-debt to EBITDA for the next two years would rise to or above 4.0x under Fitch's price deck for WTI oil prices of $50/bbl for 2015 and $60/bbl for 2016.

The Negative Outlook reflects further potential long-term effects the reduction in capex may have on the company's ability to replace the production from the Piriri-Rubiales field with new fields. The Piriri-Rubiales field accounts for approximately 35% of Pacific Rubiales' total production, and reverts back to Ecopetrol in the middle of 2016 and that Pacific Rubiales production declines in 2016 and 2017 as a result of this.

Under Fitch's price deck assumption for 2015, Pacific Rubiales' liquidity position will be pressured but would still be manageable. Further price decreases could trigger covenants embedded in Pacific Rubiales' indebtedness as soon as the end of 2015. As of March 31, 2015, Pacific Rubiales reported $861 million of cash on hand and approximately $18 million of short-term debt and the remaining debt has a manageable amortization schedule.

Fitch estimates Pacific Rubiales' FCF would break even at oil prices of between $60/bbl-$65/bbl for the next 24 months. This assumes cash costs are successfully cut per barrel by 15% and capex trimmed back to $1 billion/year. Under this scenario, Pacific Rubiales' net leverage would range between 3.2x and 4.2x. If current prices of $50/bbl are sustained for the next 24 months, EBITDA margins could decrease to the low 20% level, FCF would turn negative and leverage could reach 6.0x-7.0x and result in further negative rating actions.

RATING SENSITIVITIES

A negative rating action would be triggered by any combination of the following events:

--A continuous deterioration of the company's capital structure and liquidity as a result of either a decrease in production as a result of capex curtailment or persistent low oil prices;

--A significant reduction in the reserve replacement ratio could affect Pacific Rubiales' credit quality given the current relatively low proved reserve life of approximately 8.3 years.

A positive rating action is unlikely in the medium term.

LIQUIDITY AND DEBT STRUCTURE

Manageable Liquidity Position: The company's liquidity position as of March 31, 2014 is relatively solid, with Pacific Rubiales reporting $861 million of cash on hand versus approximately $18 million of short-term debt. The company's remaining debt has a manageable amortization schedule, with no major maturities until 2019. Fitch estimates Pacific Rubiales would break-even in terms of FCF at oil prices between USD60/bbl-USD65/bbl, but the company would be under a very stressed position should current oil prices be maintained. Under Fitch's price deck for WTI oil prices of $50/bbl for 2015 and $60/bbl for 2016, Pacific Rubiales' credit metrics would deteriorate in 2015 and 2016 with leverage, as measured by total-debt to EBITDA, rising to or above 4.0x.

KEY ASSUMPTIONS

--Fitch's price deck for WTI oil prices of $50/bbl for 2015 and $60/bbl for 2016;

--Piriri-Rubiales field reverts to Ecopetrol in 2016;

--Production declines on a year-over-year basis in 2016 and 2017.

Fitch has downgraded the following ratings:

Pacific Rubiales Energy Corp.

--Foreign and local currency IDRs to 'B+' from 'BB';

--International senior unsecured bond ratings to 'B+/RR4' from 'BB'.

The Rating Outlook is Negative.

Date of Relevant Rating Committee: 9 July 2015

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987770

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987770

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Contacts

Fitch Ratings
Primary Analyst
Lucas Aristizabal
Senior Director
+1-312-368-3260
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Xavier Olave
Associate Director
+1-212-612-7895
or
Committee Chairperson
Daniel R. Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Lucas Aristizabal
Senior Director
+1-312-368-3260
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Xavier Olave
Associate Director
+1-212-612-7895
or
Committee Chairperson
Daniel R. Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com