CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed all ratings for Newfield Exploration Co. (Newfield; NYSE: NFX). The Rating Outlook is Stable.
Approximately $2.4 billion of debt is affected by today's rating action. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Newfield's ratings reflect the company's liquids-focused production profile and proved reserves (1p) base, strong reserve replacement history, adequate liquidity, favorable hedging position, and credit-conscious financial policy. These considerations are offset by the company's modest size, historical loss of momentum associated with its restructuring activity, and heightened execution risk given the relatively early development stage of and higher capital allocation toward its STACK position (70% of planned capital expenditures in Anadarko Basin). Fitch recognizes, however, that results from the STACK play have been encouraging with strong growth potential from multiple, oil-weighted stacked intervals and opportunities to further improve economics through production efficiencies. Newfield estimates single, life of well pre-tax IRRs to be in excess of 30%-40% based on West Texas Intermediate (WTI) and Henry Hub prices of $55/$60/$65 and $3.00/$3.50/$4.00, respectively, for the first three years and flat prices thereafter.
The company reported year-end 2014 net proved reserves of 645 million barrels of oil equivalent (mmboe) and production of 135 thousand boe per day (mboepd; 57% liquids), 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. First quarter 2015 production increased to 140 mboepd (61% liquids) benefiting from a full quarter of offshore China operations and strong U.S. onshore operating results. The Fitch-calculated one-year organic reserve replacement rate was about 250% with an associated finding and development (F&D) cost of $16.50 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 proforma debt/LTM EBITDA, debt/1p reserves, and debt/flowing barrel were approximately 1.9x, $3.80/boe, and $17,450, respectively, as of March 31, 2015. These metrics are generally consistent with or better than similarly rated North American E&P peers. Fitch's base case, assuming a WTI price of $50, forecasts debt/EBITDA of under 1.8x 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 and cash flow 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 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 (dropping from 4 rigs to 1 rig in 2015). Approximately 70% of the capital budget is allocated to the Anadarko Basin. Total production, adjusted for asset sales, is expected to increase 18% year-over-year (mid-point 146.5 mboepd). This considers a relatively flat year-over-year fourth quarter U.S. production profile and the commencement of offshore China operations.
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 has 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 approach a free cash flow (FCF) neutral profile in 2015. However, the cash costs associated with fourth-quarter 2014 capital accruals ($134 million in first-quarter 2015) will weigh negatively on FCF. The Fitch base case results in debt/EBITDA of under 1.8x in 2015. Debt/1p reserves and debt per flowing barrel metrics are forecast to be approximately $3.60/boe, subject to any revisions, and $16,500, 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 debt/EBITDA of 1.8x.
Newfield favorably maintains a rolling, multi-year hedging program, using a combination of swaps, swaps with short puts, and three-way collars, to manage cash flow variability and support development funding. Fitch notes that the company recently purchased calls to cover a portion of its short put position in 2016 effectively locking in a portion of oil hedge spreads. Further, 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 May 5, 2015, Newfield's U.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 March 31, 2015, the company had proforma cash and cash equivalents of $59 million. The company's primary source of liquidity is the recently upsized and extended $1.8 billion senior unsecured credit facility due June 2020. Additional liquidity is provided by $195 million in money market lines of credit. The revolver and money market lines of credit had no outstanding borrowings at the end of the first quarter 2015. Proforma liquidity, as of March 31, 2015, was nearly $2.1 billion.
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 customary 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 $185 million, as of March 31, 2015, from $122 million at year-end 2013 principally due to the addition of AROs related to the Pearl development in China and U.S. onshore well growth. Other contingent obligations, as of Dec. 31, 2014, totaled $832 million on a multi-year, undiscounted basis comprising firm transportation agreements ($389 million) and operating leases and other service contracts ($443 million). Fitch believes these other liabilities are manageable and are generally consistent with similarly rated peers.
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.
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;
--Domestic and total production growth of over 9% (134.5 mboepd) and nearly 19% (148.2 mboepd) in 2015, respectively, generally consistent with the top-end of guidance. Fitch forecasts modestly lower production in 2016 due to our price-driven activity assumptions with an uptick in production thereafter;
--Liquids mix increases to 63% in 2015 with the heightened production growth in the Anadarko Basin and commencement of operations in China. Fitch assumed a continued focus on liquids thereafter;
--Capital spending is forecast to be approximately $1.2 billion in 2015, consistent with guidance, plus the cash effects of Q4 2014 capital accruals. Fitch assumes management continues to manage capex until market prices are supportive of longer term production growth and cash flow outspend;
--Retention of the offshore China operations.
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 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 has affirmed the following ratings and assigned Recovery Ratings as follows:
Newfield Exploration Co.
--Long-term IDR at 'BB+';
--Senior unsecured bank facility at 'BB+'/RR4;
--Senior unsecured notes at 'BB+'/RR4.
The Rating Outlook is Stable.
Fitch has also withdrawn Newfield's senior subordinated notes rating of 'BB' following the full redemption of all outstanding subordinated debt.
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);
--'Full Cycle Costs Drop for North American E&Ps (Efficiency Gains Show Up in 2014 Numbers)' (March 24, 2015);
--'High-Yield E&P Stress Test (Examining Exposure to the Downturn)' (April 20, 2015);
--'E&P Borrowing Base Redeterminations (Lenders May Go Easy on U.S. High Yield Energy Issuers in Downturn Scenario)' (Dec. 5, 2014);
--'U.S. LNG: Dimming Prospects? (Low Oil Prices, Supply/Demand Profile, Asian LNG Pricing Introduce Outlook Uncertainty)' (May 7, 2015);
--'Production Sharing Contracts: Countercyclicality Supports Debt in a Low Oil Price Environment' (Jan 28, 2015);
--'U.S. Rig Counts Under Pressure (Downcycle to Fewer than 1,000 Rigs Followed by Longer, Slower Recovery)' (Feb. 5, 2015);
--'Global Impact of US Shale Oil - Rising Production Tempers World Prices' (Feb. 10, 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
Fitch Oil and Gas Assumptions Summary Feb 2015
Full Cycle Costs Drop for North American E&Ps (Efficiency Gains Show Up in 2014 Numbers)
High-Yield E&P Stress Test (Examining Exposure to the Downturn)
U.S. LNG: Dimming Prospects? (Low Oil Prices, Supply/Demand Profile, Asian LNG Pricing Introduce Outlook Uncertainty)
Production Sharing Contracts (Countercylicality Shines in a Low Oil Price Environment)
U.S. Rig Counts Under Pressure (Downcycle to Fewer than 1,000 Rigs Followed by Longer, Slower Recovery)
Global Impact of U.S. Shale Oil (Rising Production Tempers World Prices)
Scenario Analysis: Lifting the Crude Export Ban (Overall Credit Impact Limited but Varies by Industry)