Fitch Affirms Apache's Long-Term Ratings at 'BBB+'; Outlook Remains Stable
Approximately $8.78 billion in debt is affected by today's rating action.
KEY RATING DRIVERS
Apache's ratings are supported by the company's significant debt repayments; rising exposure to liquids; high capex flexibility; historical track record of solid operational performance in the space; and recent exit from its liquefied natural gas (LNG) investments, which had previously created concerns about plugging a potentially multi-year funding gap associated with these long-term projects.
Credit concerns center on the reduction in size and diversification stemming from recent asset sales, including a reduction in countercyclical production-sharing contracts (PSCs); the impact sustained lower oil prices will have on company cash flows and credit metrics; and some uncertainty about the strategic direction the company will take following recent leadership changes.
DOWNSIZING OF INTERNATIONAL LARGELY COMPLETE
Apache's restructuring appears to be complete for now, as the company has reduced its international footprint and refocused on the U.S. onshore. Year to date, Apache has sold off stakes in its LNG projects (Kitimat and Wheatstone), its Australia upstream position, as well as its Yara fertilizer facility. These followed earlier sales of a one-third stake in its Egyptian assets to Sinopec, its Argentine position to YPF, its shallow-water GoM properties to Fieldwood, as well as the sale of non-operated interests in the Deepwater GoM.
We do not expect to see additional reductions in APA's international footprint for now, given the advantages associated with international PSCs during low oil prices, as well as Apache's relatively advantaged position in the North Sea. As of Sept. 30, 2015, North American onshore production comprised approximately 56% of the APA's total production. Looking forward, we expect the U.S. segment will grow rapidly relative to other regions in a supportive price environment, given the company's favorable position in the Permian.
ASSET SALES DRIVE DEBT REDUCTIONS
Asset sales have been a key driver of Apache's deleveraging. Over the last several quarters, Apache repaid a meaningful portion of debt. Debt has fallen from a high of $12.78 billion at mid-year 2013 to just $8.77 billion as of Sept. 30, 2015. Repayments include all outstanding commercial paper (CP) balances and $900 million in long-term debt (APA's 5.625% and 1.75% notes due 2017).
SOME LOSS OF DIVERSIFICATION AND SCALE
The asset sales mentioned above have resulted in some loss of cash flow diversification and scale. International PSCs are positive from a credit perspective in a downcycle because of their countercyclical nature (oil barrels recovered tend to rise in a falling oil price environment and fall in a rising environment, offsetting some of the volatility seen with commodity prices). This is countered by the higher profit and growth potential of shale, particularly as operators move down the efficiency curve in a given play, but this benefit is clearer in a higher price environment.
As of Sept. 30, 2015, APA had a material presence in just four countries: the U.S., Canada, UK (North Sea), and Egypt. In terms of size, prior to restructurings, Apache's production had hit a peak of approximately 780,000 boepd in 2012; for 2015, on a pro forma basis after adjusting for minority interests and Egypt tax barrels, company guidance is for production of approximately 480,000 boepd.
NEGATIVE FCF TO MODERATE
As calculated by Fitch, Apache's LTM free cash flow (FCF) stood at negative $2.51 billion as of Sept. 30, 2015, and was consisted of cash flow from operations (including discontinued operations) of $4.54 billion, minus capex of $6.67 billion and common dividends of $377 million. The LTM figures include capex spending on LNG projects which have since been divested.
Under a lower-for-longer price scenario, we believe APA is likely to have significant additional capex flexibility. Looking forward, we expect APA's 2016 FCF deficit will drop significantly to negative $550 million under our base case assumptions. Company guidance for 2015 capex is $3.8 billion (which excludes capitalized interest and other non-core spending), an approximately 40% reduction from LTM levels.
APA's other financial metrics were reasonable at Sept. 30, 2015, and included balance sheet debt/EBITDA of 1.73x, EBITDA/gross interest coverage of 7.3x, and FFO interest coverage of 6.7x.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case include:
--WTI oil prices of $50/bbl in 2016 and $60/bbl in 2017, rising to a long-term price of $70 by 2019;
--Henry Hub natural gas prices of $2.75/mcf in 2016, rising to a long-term price of $3.50/mcf by 2019;
--2016 capex of approximately $4 billion;
--Production volume growth averaging 4.4% from 2016-2019;
--No material equity repurchases;
--Modest dividend growth.
RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating actions include:
--Sustained improvement in key metrics, including some combination of the following: debt/boe Proven Developed (PD) reserves of $4.00-$4.50/boe, debt/EBITDA below approximately 1.25x; as well as increased size and scale.
Negative: Future developments that could lead to negative rating action include:
--Significant additional leverage added to the balance sheet stemming from expansions in capex; a large leveraging transaction; or debt-funded share buybacks;
--A major operational issue or reserve impairment;
--Sustained deterioration in key metrics, including some combination of the following: debt/boe PD above approximately $6.00/boe, and debt/EBITDA above the 1.5x-2.0x range.
LIQUIDITY AND MATURITY PROFILE
At Sept. 30, 2015, Apache's liquidity was good. Cash and equivalents were $1.66 billion. There were no drawings on the company's $3.5 billion unsecured revolver, for total liquidity of approximately $5.16 billion. The revolver matures in June of 2020 and is used to backstop Apache's $3.5 billion CP program. Near-term maturities are manageable. The company recently redeemed all of its 2017 maturities; as a result, the next maturities are not due until 2018 ($550 million due), and 2019 ($150 million).
Covenant restrictions across Apache's debt instruments are light and include a 60% debt-to-capitalization maximum in its revolver, as well as merger restrictions, asset sale restrictions, limitations on sale leasebacks, and change of control provisions. APA's unadjusted debt-to-capital rose to 42% in the third quarter (3Q15) from 29% at YE 2014 but this was driven by changes in book equity (including asset sales and recent large non-cash impairments) rather than increases in gross debt. On a bank covenant basis, debt-to-capital was 33% in 3Q15.
OTHER LIABILITIES:
Apache's other obligations are manageable. The company has a small UK pension plan which was underfunded by just $10 million at YE 2014. The company's Asset Retirement Obligation (ARO) declined to $2.56 billion at the end of 3Q15, down substantially from the $3.09 billion seen at YE 2014. The main driver of this decrease was the removal of AROs associated with divested assets. Accrued environmental reserves in 3Q15 were $62 million versus $68 million at year-end 2014.
FULL LIST OF RATING ACTIONS
Fitch currently rates Apache as follows:
--L-T Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured credit facility at 'BBB+';
--Senior unsecured notes at 'BBB+'.
--Commercial paper at 'F2';
--Short-term IDR at 'F2'.
The Rating Outlook is Stable.
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