CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) for Anadarko Petroleum Corporation (NYSE: APC) and Kerr-McGee Corp. at 'BBB'. Anadarko's Short-Term IDR and commercial paper rating have been upgraded to 'F2' from 'F3'. The Rating Outlook has been revised to Stable from Negative.
KEY RATING DRIVERS
Ratings for APC are supported by the company's significant production scale, demonstrated asset quality, quality track record as an upstream operator, strong liquidity position, and successful history of asset development and monetization.
Successful Navigation of Commodity Downturn
APC has met or exceeded Fitch's expectations on numerous credit-supportive actions. The company has executed nearly $3 billion in asset sales YTD, with line of sight on $4 billion in total proceeds during calendar 2016. Fitch expects 2016 year-end liquidity of approximately $7.5 billion, consisting of $5 billion in credit facility availability and $2.5 billion in cash. In February 2016, APC cut its dividend to $100 million per year from $550 million, helping to stem cash burn during the commodity downturn. Long-term debt issuance of $3 billion in the spring served to successfully refinance near-term maturities, including the early redemption of $1.75 billion of senior notes due in 2016 and a tender for $1.25 billion of notes due in 2017. Additionally, APC has issued notice to redeem the remaining $750 million of 2017 senior notes.
GoM Transaction Credit Positive
On Sept. 12, 2016, APC announced the purchase of deepwater Gulf of Mexico (GoM) assets from Freeport McMoran. The company expects to deploy GoM free cash flow (FCF) into North American onshore positions, primarily the Delaware and D.J. basins. To fund the purchase, APC raised $2.2 billion in equity, making the deal immediately deleveraging, as the properties have 80 thousand barrels of oil equivalent per day (mboe/d) of production (80% oil) associated with them. The purchase will double APC's ownership in the Lucius asset to 49% from 23.8% at year-end 2015 and increase exposure to Heidelberg. Fitch believes the transaction was executed on favorable terms for APC, particularly given its operational integration, stage of development, FCF outlook and oil mix. APC has disclosed an acquisition price of $13.50/boe for proved reserves, which is competitive given the oil-weighted reserve base.
Based on recent strip pricing, APC estimates that its overall GoM position will generate significant FCF in 2017-2021. This should provide incremental FCF to drive growth in APC's U.S. onshore position, in particular the Delaware and D.J. basins, improving visibility on APC onshore volumes. This flows through as a longer-term positive for Western Gas Partners (WES), APC's midstream Master Limited Partnership.
WES Enhances Financial Flexibility
Through its general and limited partnership ownership of Western Gas Equity (WGP) and interests in WES, APC controls significant midstream infrastructure related to its upstream operations. WES has allowed APC to fund upstream operations with a high-value master limited partnership (MLP) currency while retaining control of assets via the GP interest. APC also retains a significant economic interest in WES and WGP through its ownership of LP units. WES and WGP LP units retained by APC can be monetized via sale to the public, providing an additional liquidity option.
Recent Financial Performance
On a consolidated basis, Fitch-calculated LTM EBITDA was $3.8 billion, down from $4.5 billion in calendar 2015, primarily due to the impact of significantly lower realized oil & natural gas prices, resulting in consolidated LTM debt/EBITDA of 4.6x. Fitch expects that leverage will remain elevated in 2016 and 2017, at 4.1x and 2.9x, respectively, moderately better than previously forecast, in part due to increased oil volumes and cash flow from the GoM acquisition. Fitch expects 2016 FCF after dividends of approximately negative $1.2 billion in 2016, but believes that completed and potential asset sales will more than offset negative cash flow and the company will end 2016 with a strong liquidity position.
Top-Tier Upstream Operator
APC's production size and reserve base rank in the top quartile of North American independent producers, and the company has successfully executed high-complexity, long lead-time projects on-time and on-budget. APC sales volumes were 780 mboe/d in the third quarter of 2016, down 1% year over year with onshore growth and new GoM production partially offsetting the effect of asset divestitures. Fitch anticipates the potential for lower overall volumes in 2017 related to recent asset divestitures. However, an increasing price deck should help fuel a return to production growth in 2018.
--Base case WTI oil price that trends up from $42/barrel in 2016 to a long-term price of $65/barrel;
--Base case Henry Hub gas that trends up from $2.35/mcf in 2016 to a long-term price of $3.25/mcf;
--Consolidated capex of $3.4 billion in 2016, increasing in out years in-line with Fitch's price deck;
--Production of approximately 782 mboe/d in 2016, increasing moderately in out years on higher capital spending and increased U.S. onshore spending.
Positive - to 'BBB+' (individually or collectively)
--Demonstrated commitment to lower gross debt levels at APC;
--Mid-cycle debt/EBITDA projections under 2x;
--Sustained neutral-to-positive free cash flow generation and positive through-the-cycle netbacks.
Negative - to 'BBB-' (individually or collectively)
--Material amounts of negative free cash flow or acquisitions funded with increases in APC gross debt;
--Mid-cycle debt/EBITDA projections above 3x;
--Mid-cycle APC debt/flowing barrel projections above $20,000.
ROBUST LIQUIDITY POSITION
As of Sept. 30, 2016 APC reported consolidated cash of $4 billion ($145 million reported at WES) and $5 billion undrawn on revolving credit facilities ($3 billion facility maturing 2021 and a $2 billion 364-day facility) leading to $8.9 billion in liquidity at APC. This provides significant flexibility to help weather the downturn in prices and redeem the remaining $750 million in senior notes due 2017. APC's liquidity position allows the company to invest through the cycle, which is a characteristic of higher-quality E&Ps. Following the redemption, the company's remaining near-term debt maturities include $114 million and $900 million of senior notes due 2018 and 2019, respectively. APC has significant leverage to oil and gas prices, and a rising price deck will have a material positive impact on financial results and cash flow.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Anadarko Petroleum Corp.
--Long-Term Issuer Default Rating (IDR) at 'BBB';
--Senior unsecured notes at 'BBB';
--Senior unsecured revolving credit facility at 'BBB'.
--Long-Term IDR at 'BBB';
--Senior unsecured notes at 'BBB'.
Fitch has upgraded the following ratings:
Anadarko Petroleum Corp.
--Short-Term IDR to 'F2' from 'F3';
--Commercial Paper to 'F2' from 'F3'.
The Rating Outlook is Stable.
Summary of Financial Statement Adjustments - Fitch has made no material adjustments that are not disclosed within the company's financial statements.
Additional information is available on www.fitchratings.com.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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