CHICAGO–(BUSINESS WIRE)–Fitch Ratings has affirmed the Long-term Issuer Default Rating (IDR) for Anadarko Petroleum Corporation (NYSE: APC) and Kerr-McGee at ‘BBB’. Anadarko’s Short- term IDR and commercial paper rating has been downgraded to ‘F3’ from ‘F2’.
The Rating Outlook has been revised to Negative from Stable.
Approximately $12.7 billion of debt, excluding non-recourse debt at Western Gas Partners (NYSE: WES), is affected by today’s rating action. A full list of ratings actions follows at the end of this release.
Ratings for APC are supported by the company’s significant production scale, demonstrated asset quality, strong track record as a quality upstream operator, adequate liquidity position, and successful history of asset development and monetization.
The Negative Outlook is driven primarily by changes to Fitch’s oil & gas price deck which lead to lower cash flow expectations and increases in near-term leverage forecasts, as well as moderate risks related to the refinancing of 2017 debt maturities and execution on potential asset sales. Fitch believes that APC has sufficient liquidity, financial flexibility, market access, and potential asset monetizations to support operations and maintain an investment-grade profile through 2018, when Fitch expects a sufficient recovery in commodity prices to support the rating at an investment-grade level. Reductions in gross debt are not modelled into Fitch’s base case projections, but would be a strong support for the rating if funded with asset sale proceeds or in an otherwise creditor-friendly manner. Fitch recognizes that Anadarko has a significant pipeline of saleable assets that could bolster liquidity and/or reduce gross debt. However, the timing of sales and use of proceeds will have to be evaluated in the context of prevailing commodity price expectations in order to determine credit quality and ratings impact. Anadarko’s strong track record regarding asset sales also provides support for the rating.
KEY RATING DRIVERS
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 produced 836 thousand barrels of oil equivalent per day (mboe/d) in 2015, at approximately 53% liquids (oil and NGLs). Fitch expects lower volumes in 2016 due to portfolio declines from reduced capex and the impact of recent asset divestitures.
APC has consistently generated positive cash netbacks (as calculated by Fitch, cash netbacks were $11/boe in 2015, down from $30/boe in 2014). Full-cycle netbacks, which include a capital cost component, were challenged in 2015 due to the combination of lower oil & natural gas prices and price revisions on 1P reserves, which impact standard capital cost calculations. However, Fitch realizes that 1P reserves de-booked related to delayed capex plans or price revisions will potentially be re-booked in a mid-cycle price environment, offsetting a portion of the effect of current period FD&A metrics on full-cycle economics.
APC owns significant fee-mineral interests in the Rockies Region through its Land Grant position. In the company’s Wattenberg position, the fee minerals ownership significantly increases total economic value on a PV-10 basis. The position creates superior economics for APC relative to competitors and provides the company with the opportunity to invest through commodity cycles in its most economic positions.
Liquidity Levers Pulled to Date
In Feb. 2016, APC cut its dividend to $100 million per year from $550 million, which will save $450 million per year. Fitch expects the company to maintain the $100 million dividend, as the current is small relative to the overall budget. On Feb 24 2016, Anadarko announced agreements to monetize approximately $1.3 billion in non-core and midstream assets. The monetizations include the sale of future royalty income from its Wyoming soda ash and coal interest ($420 million), the East Chalk asset ($105 million), and the 50.1% interest in the Maverick Basin gathering system to Western Gas Partners ($750 million). Fitch expects that asset sales will continue to be a part of APCs strategy for navigating the downturn, but recognizes that the size and timing of sales proceeds is uncertain.
Reduced 2016 Capital Plan
APC has set an initial 2016 capital budget of $2.6 – $2.8 billion (exluding capital spending at WES), which is approximately 50% lower than 2015 capex and approximately 70% lower than 2014. Lower drilling activity in 2016 will likely result in modest production declines. Fitch expects oil production to remain relatively flat YoY, as the majority of capex dollars are focused on development of liquids properties and Gulf of Mexico oil volumes (Lucius/Heidelberg) will help to support output. Gas volumes are expected to comprise the majority of the decline, as this portion of the portfolio will likely run closer to a natural decline rate with less support from new drilling activity. Fitch expects U.S. onshore development to focus primarily on the Wattenberg and Permian horizontal programs in the light of low oil & gas prices. This will allow a moderate pace of well completions and will help to sustain volumes into the company’s gathering & processing systems, which are primarily the Western Gas assets.
Recent Financial Performance
On a consolidated basis, Fitch-calculated EBITDAX for 2015 was $4.5 billion, down from $10.4 billion in 2014, primarily due to the impact of significantly lower realized oil & natural gas prices. LTM debt/EBITDAX increased to 3.4x from 1.5x in 2014. Fitch currently expects that leverage will remain elevated in 2016 and 2017 (5.1x and 3.6x, respectively) before dropping in 2018 to levels consistent with mid-cycle leverage tolerances for the rating category. Fitch expects 2016 free cash flow after dividends of approximately -$1.1 billion in 2016, but believes that completed and potential asset sales will be sufficient to offset negative cash flow in 2016 and that liquidity will remain adequate.
Western Gas Increases Financial Flexibility
Through its GP & LP ownership of Western Gas Equity (WGP) and interests in Western Gas Partners (WES), APC controls significant midstream infrastructure related to its upstream operations. WES has allowed APC the ability to execute asset dropdowns (sales from E&P to MLP), effectively allowing APC to fund upstream operations with a higher-value 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.
Fitch’s key assumptions within the rating case for APC include:
–Base case WTI oil price that trends up from US$35/barrel in 2016 to a long-term price of US$65/barrel;
–Base case Henry Hub gas that trends up from US$2.25/mcf in 2016 to a long-term price of US$3.25/mcf;
–E&P capex of $2.8 billion in 2016;
–Production of approximately 782.5 mboe/d in 2016, including the impact of divestitures, declining to approximately 700 mboe/d in 2017. Production declines are primarily related to natural gas volumes, with oil volumes essentially flat through our forecast;
–2016 maturities are refinanced at market rates.
Negative: to ‘BBB-‘ (individually or collectively)
–Material amounts of negative free cash flow or opportunistic acquisitions funded with increases in APC gross debt
–Mid-cycle E&P Debt/EBITDA projections above 2.5x
–Mid-cycle APC debt/flowing barrel projections above $18,000
Resolution of Negative Outlook:
–Credit-neutral resolution of near-term maturities with no increases in gross debt
–Successful execution of non-core asset sales, with proceeds applied to decrease gross debt or increase liquidity cushion
–Mid-cycle debt/EBITDA projections under 2.5x
Positive: to ‘BBB+’ (individually or collectively)
–Demonstrated commitment to significantly lower gross debt levels at APC
–Maintenance of significant liquidity cushion during the current cycle
–Mid-cycle debt/EBITDA projections under 2.0x
–Mid-cycle APC debt/flowing barrel projections under $15,000
Upgrades to ‘BBB+’ are not considered likely in the near term due to expectations for elevated leverage in 2016 and continued weakness in commodity prices.
ADEQUATE LIQUIDITY POSITION
As of Dec. 31, 2015 the company had $939 million in cash and a combined $4.75 billion of capacity on the $3.0 billion and $2.0 billion unsecured revolving credit facilities leading to $5.7 billion in current liquidity. This provides significant flexibility to help weather the downturn in prices, and ultimately to bridge potential negative free cash flow until Fitch’s mid-cycle price assumptions in 2018. Fitch notes that $2.0 billion in liquidity is related to a 364-day facility that matures in January 2017, presenting some liquidity risk related to bank participation and APC’s ability to extend the facility. APC’s liquidity position allows the company to invest through-the-cycle, which is a characteristic of investment-grade E&Ps. Given the large oil & gas production base, the company has significant leverage to oil and gas prices, and any change in oil and gas prices will have a material impact on financial results and cash flow.
Anadarko has zero-coupon notes due 2036, which can be put to the company in October of each year, in whole or in part, for the then-accreted value, which will be $839 million at the next put date in October 2016. Fitch believes the potential exists for a put of a portion of the zeros. As of Dec. 31, 2015, the company had ~$5.7 billion in liquidity, making a put of the entire $839 million a manageable event which could serve to reduce gross debt if funded with asset sale proceeds.
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 downgraded the following ratings:
Anadarko Petroleum Corp.
–Short-term IDR to ‘F3’ from ‘F2’;
–Commercial Paper to ‘F3’ from ‘F2’;
The Rating Outlook is Negative.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Short-Term Ratings Criteria for Non-Financial Corporates (pub. 13 Aug 2015)
Dodd-Frank Rating Information Disclosure Form