Fitch Affirms Pan American Energy LLC's Foreign and Local Currency IDRs; Outlook Negative
The Rating Outlook for the company's foreign and local currency IDR is Negative.
KEY RATING DRIVERS
The primary negative factor impacting PAE and PAME's ratings are the companies' exposure to political interference in Argentina. The companies face a volatile domestic business environment and inflationary pressures on their cost structures. In comparison with its Argentine peers, PAE/PAME's ratings are supported by the companies' stronger business position, large reserves base, low leverage and strong operating performance. The foreign currency IDR, one-notch higher than Argentina's country ceiling, is also supported by the companies' reliable and strong cash flow generation, high level of dollar-denominated export revenues relative to total debt, strong parent ownership, and a good track record of payment during stressed sovereign scenarios. Positively, PAE/PAME possess ample liquidity and have proven access to the financial markets.
EXPOSURE TO GOVERNMENT INTERFERENCE: The Argentine government has a history of significant interference in the oil and gas sector. Via Decree No. 1277, in 2012 the government gained oversight of investment levels in the oil and gas sector and domestic price reference points. In 2012, via Law No. 26,741, the Argentine government nationalized Argentina's largest energy company, YPF S.A. (Fitch IDR: 'CCC'). Although in recent years, government regulations maintained domestic crude oil prices significantly below world prices, these same regulations have been able to keep Argentine crude oil prices above global prices despite the global price decline seen during the last year.
Given PAE/PAME's large oil export program, the global oil price decline has a negative impact on the company's operations. Recent government moves have been positive in this regard, with the Crude Oil Production Stimulus Program put in force in February 2015. The Argentine government agreed to provide an export stimulus and/or production stimulus for companies participating in the program. This program provides a payment in Argentine pesos to the beneficiary companies of up to USD3/bbl when the company's quarterly production of crude oil is equal to or greater than the base production level under the program (December 2014 is the baseline). If the beneficiary companies manage to satisfy all the demand of all of the domestic refineries, then they can export this petroleum and can receive an additional payment equivalent to USD2-USD3/bbl. Furthermore, the government decreased the export tariff rate to 1% when the price of exported crude oil is less than USD71/BBL. Previously, the export tariff rate was 10% when the international price of oil was below USD70/BBL.
PAME is also benefiting from Resolution No. 1/2013, which created an incentive program for generating incremental natural gas production. Companies in the Argentine energy sector who qualified for the program, including PAME, that manage to increase gas production are entitled to receive compensation between USD7.50 per million BTU (MMBTU) and their invoiced average gas price. This is a significant incentive program given average natural gas prices for the company have been in the USD2+/MMBTU levels in prior years.
HIGH TRANSFER AND CONVERTIBILITY RISK: Following publication of Decree No. 1722 on Oct. 26, 2011, PAME is obliged to repatriate 100% of its export revenues. Prior to this date, oil and gas producers could maintain up to 70% of export proceeds abroad, which provided a shield against transfer and convertibility risk. This change in regulation highlights an increased intervention by the government in the oil and gas sector and potential for increased foreign currency controls.
STRONG BUSINESS POSITION: PAME has a strong business position in the Argentine market and its credit metrics are expected to remain strong. Strong parent ownership, reliable cash flow generation, and significant levels of exports support PAE's foreign currency Issuer Default Rating (IDR) which is rated one notch above Argentina's country ceiling. PAE is 60% owned by BP (rated 'A' by Fitch with a Negative outlook). PAME's export net revenues totalled USD1.3 billion in 2014 and compare favorably to its long-term debt maturities. In addition, the company has a track record of meeting payments during stressed sovereign scenarios.
LARGE RESERVE BASE AND STRONG CAPITAL STRUCTURE: As of Dec. 2014, PAME was Argentina's largest proved reserves holder, with oil and gas reserves of 1.418 billion barrels of oil equivalent (boe), equivalent to 18 years of production (25 years for oil, 11 years for natural gas). PAME's leverage is low at approximately USD1 of debt per barrel of proved reserves (as of December 2014). The company has historically increased reserves and production volumes sustainably, despite operating in a challenging environment.
SOLID OPERATING PERFORMANCE: PAME has maintained a strong operating performance during the past year despite a double-digit inflation rate and a difficult economic climate in Argentina. During the 2001-2014 period the company increased oil production in Argentina by 27% from 81kboe/d to 103kboe/d. During this same period, gas production has increased by 75% to 18 million cubic meters per day (m3/d) from 11 million m3/d. Proved reserves increased by 10% during 2012-2014, which is consistent with the growth seen in 2010-2012. Fitch expects the company to continue to register growth (though slightly lower than recent trends) going forward.
FINANCIAL STRENGTH CONTINUES: For the December 2014 full year, PAME's EBITDA was USD1.523 billion, representing 5% year-over-year growth. EBITDA margins of 50.4% were up nearly 300 basis points (bps) during this period and up nearly 1,000 bps versus 2012 margins of 40.9%.
RATING SENSITIVITIES
PAE/PAME's ratings could be negatively affected by a further economic deterioration in Argentina and the Republic of Argentina's inability to convert and transfer foreign exchange for the companies. Catalysts for a negative rating action include a material increase in the government's negative interference in the sector, and a significant increase in debt levels without the associated revenue increase. A total debt:EBITDA ratio greater than 3.5x and EBITDA-to-interest coverage below 4.5x could be viewed negatively.
A positive rating action is unlikely in the short- to medium-term due to the business environment in Argentina and Argentina's current sovereign Restricted Default rating. An upgrade of the Argentine Sovereign could potentially result in a positive rating action.
LIQUIDITY AND DEBT STRUCTURE
ADEQUATE LIQUIDITY: PAME's total cash and equivalents amounted to approximately USD24 million as of March 31, 2015, which is equivalent to 4% of short-term debt totalling USD571 million. Given the company's strong operational track record along with strong parent company support, Fitch does not anticipate any difficulties for the company to tap local debt markets in order to re-finance short-term debt.
KEY ASSUMPTIONS
--Production growth in the low single-digits per year;
--Long-term energy prices in Argentina converging with world prices over the next five years;
--PAME's EBITDA expected to be consistent with 2014 EBITDA of USD1.5 billion;
--Annual Capex for PAME going forward consistent with 2014 capex of approximately USD1.5 billion;
--Gross leverage metrics in the 1x-1.5x range in the short- to medium-term for PAME.
Fitch has affirmed the following ratings:
Pan American Energy LLC.
--Foreign currency IDR at 'B-';
--Local currency IDR at 'B+'.
Pan American Energy LLC Sucursal Argentina
--International senior unsecured bond ratings at 'B'; Recovery Rating revised to 'RR4' from 'RR3'.
The Rating Outlook is Negative.
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