OREANDA-NEWS. 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.