OREANDA-NEWS. Fitch Ratings has affirmed Pioneer Natural Resources Co.'s (Pioneer; NYSE: PXD) long-term Issuer Default Rating (IDR) and unsecured debt ratings at 'BBB-'. The Rating Outlook is Stable.

Approximately $3.7 billion in debt is affected by today's rating actions. A full list of rating actions is provided at the end of this press release.

KEY RATING DRIVERS

Pioneer's ratings reflect its liquids-focused onshore production and proved reserve base, maintenance of through-the-cycle operational momentum in its core Permian position, strong liquidity profile, and credit conscious financial policy. Offsetting factors include the company's production size, which is at the low end of the range for the rating category, limited geographic diversity, and growth-oriented equity base that may encourage an acceleration of drilling activity ahead of supportive pricing signals.

Fitch recognizes that the steps taken by management to manage the company's through-the-cycle financial profile are generally consistent with or in excess of E&P peer actions. The company has attempted to manage cash flows by reducing operating and capital spending and opportunistically adding hedge positions. Pioneer also improved its liquidity profile via a non-core, non-producing asset sale in Q3 2015 and equity issuance in Q1 2016. Additionally, near-term maturities were addressed with a prefunding debt issuance in Q4 2015. In a lower-for-longer scenario, the company could further reduce capital spending to manage to a neutral free cash flow (FCF) profile and preserve liquidity, although such an action could negatively impact the company's operational momentum.

The company reported 2015 net proved (1P) reserves of 664 million barrels of oil equivalent (mmboe); 1P reserves were 89% proved developed (PD). Reported 2015 production was 204 thousand boe per day (mboepd) (52% oil), resulting in a reserve life of under nine years. Production has continued to grow, reaching 215 mboepd (53% oil) in the fourth quarter 2015. Reported 2015 drillbit reserve replacement was 273% with an associated finding and development (F&D) cost of $10.18/boe, excluding negative price revisions of 269 mmboe and nominal acquired reserves. Liquids mix, principally oil, continues to improve year-over-year to 70.5% in 2015 compared to 67.9% in 2014.

Credit metrics remain strong with gross debt/EBITDA of approximately 1.9x, as of Dec. 31, 2015. The debt/EBITDA metric improves to over 1.4x when excluding the nearly $1 billion in 2016 and 2017 prefunded debt maturities. The Fitch-calculated debt/1P reserves, debt/PD reserves, and debt/flowing barrel metrics, as of Dec. 31, 2015, were approximately $5.55/boe, $6.20/boe, and $18,085, respectively, on a gross debt basis. These metrics improve to approximately $4.15/boe, $4.65/boe, and $13,480, respectively, on a net of prefunded debt basis. Fitch notes that these metrics are generally consistent with or better than similarly rated North American E&P peers. Leverage metrics have benefited from the company's favorable hedge position and ability to fund its oil production growth-oriented capital spending with cash flow from operations, cash-on-hand, and non-core, non-producing asset sale proceeds.

CONTINUED OUTSPEND FORECAST, METRICS REMAIN SOLID

Fitch's base case projects that Pioneer will be $850-$900 million FCF negative in 2016. Proceeds from the EFS midstream asset sale and cash on hand are anticipated to be more than sufficient to cover the shortfall. The Fitch base case results in 2016 debt/EBITDA of approximately 2.1x on a gross debt basis and 1.8x net of prefunded debt. Debt/PD and debt/flowing barrel metrics are forecast to be about $4.75/boe and under $14,220, respectively, on a gross debt basis. These metrics improve to approximately $4.00/boe and $12,085, respectively, net of prefunded debt.

Pioneer 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. 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 March 18, 2016, Pioneer's anticipated 2016 oil and gas production was about 85% and 70% hedged, respectively. Existing oil and gas hedges also provide around 50% and 25% coverage for 2017. Fitch believes management will continue to layer in oil and gas hedges, particularly three-way collars to provide upside potential and long put protection around $45/barrel and $2.75/mcf, consistent with reported hedge additions during February and March 2016.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Pioneer include:

--WTI oil price that trends up from $35/barrel in 2016 to a long-term price of $65/barrel;
--Henry Hub gas that trends up from $2.25/mcf in 2016 to a long-term price of $3.25/mcf;
--Production grows to approximately 228 mboepd in 2016, generally consistent with management guidance, followed by a measured growth profile thereafter;
--Liquids mix improves to approximately 74% in 2016 followed by additional oil production growth thereafter;
--Capital spending of $2 billion in 2016, followed by liquidity- and operating cash flow-linked changes thereafter;
--Receipt of the $500 million EFS Midstream asset sale proceeds in July 2016;
--Repayment of the $455 million 5.875% and $485 million 6.65% notes in 2016 and 2017, respectively.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--Increased size, scale, and diversification of Pioneer's operations and some combination of the following metrics;
--Maintenance of a mid-cycle debt/EBITDA below 2.0x-2.25x on a sustained basis;
--Preservation of a mid-cycle debt/1P reserves below $5.00-$5.50/boe and/or debt/flowing barrel under $15,000-$17,500.

Future positive rating actions will be closely linked to Pioneer's ability to develop and grow its core production profile and reserve base while maintaining financial flexibility. Fitch does not expect a positive rating action in the current pricing environment.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Failure to manage liquidity and FCF leading to significantly reduced financial flexibility;
--Material deviation from management's target leverage ratio resulting in a mid-cycle debt/EBITDA of over 2.5x-2.75x on a sustained basis;
--Mid-cycle debt/1P reserves of over $6.00/boe and/or debt/flowing barrel above $20,000;
--Material acceleration of development activity ahead of an improvement in the oil & gas price environment and/or prior to entering into supportive hedge positions.

STRONG LIQUIDITY POSITION AND MANAGEABLE MATURITY PROFILE

Pro forma cash-on-hand was approximately $2.6 billion, including the $500 million July 2016 instalment of EFS Midstream sale proceeds and excluding the roughly $1 billion in prefunded debt proceeds related to the 2016 and 2017 maturities. Additional liquidity is provided by the company's $1.5 billion unsecured credit facility (no borrowings as of Dec. 31, 2015) maturing in August 2020. The revolver contains two one-year extensions subject to lender consent.

Pioneer's main financial covenant, as defined in the credit facility, is a maximum debt-to-book capitalization ratio, less non-cash asset impairments and certain other items, of 60% (approximately 26% as of Dec. 31, 2015). Other customary covenants consist of additional lien limitations, transaction restrictions, and change in control provisions.

Near-term maturities are manageable with $455 million (5.875% notes) due in July 2016, $485 million (6.65% notes) due in March 2017, $450 million (6.875% notes) due in May 2018, and $450 million (7.5% notes) due in January 2020. Management's willingness to prefund its upcoming maturities when market access was available helps to support financial flexibility and Fitch anticipates that debt will continue to be proactively refinanced.

OTHER LIABILITIES

Pioneer does not maintain a defined benefit pension plan. The company's asset retirement obligations (ARO) increased year-over-year to about $285 million, as of Dec. 31, 2015, from $189 million. The increase primarily reflects a change in the forecasted timing of abandoning wells due to their shorter economic lives in the current lower commodity price environment.

The company had 2016 contractual obligations that totalled approximately $654 million, as of Dec. 31, 2015. The obligations include: $451 million in gathering, processing, and transportation charges, $179 million in drilling commitments, and $24 million in operating leases for equipment, office space, etc.

FULL LIST OF RATING ACTIONS

Fitch has affirmed Pioneer's ratings as follows:

Pioneer Natural Resources Co.
--Long-term IDR at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Bank revolver at 'BBB-'.

The Rating Outlook is Stable.