TEXT-Fitch rates Newfield Exploration's notes 'BB+'
June 19 - Fitch Ratings has assigned a 'BB+' rating to Newfield Exploration Company's (Newfield; NYSE:NFX) expected issuance of unsecured notes due 2024. The net proceeds are intended to fund the purchase of up to $550 million in principal amount of the 2016 notes. Proceeds will also be used to repay a portion of the borrowings outstanding under the revolving credit facility, which were drawn to fund the redemption of the 6 5/8% senior subordinated notes due 2014. Newfield's Rating Outlook remains Stable. A complete list of ratings is provided at the end of this release. The ratings reflect Newfield's relatively conservative financial profile. While management has stated it is willing to borrow to finance acquisitions, Fitch would expect acquisitions to be relatively small. Additionally, Fitch expects Newfield to finance its acquisitions with divestitures of non-core related assets as the company focuses on high-grading its asset base. The Stable Outlook reflects solid liquidity and operating momentum from liquids production growth. This contrasted with the timing and challenge of Newfield's transition from being primarily a natural gas producer to being an oil focused company. Reserve growth for 2011 was driven by undeveloped bookings in the Williston (Bakken) and Monument Butte (Uinta) fields (72 of 143 mmboe in total organic adds). Gains were partially offset by the reclassification of 15 mmboe of natural gas from proved undeveloped reserves to probable reserves (as required by SEC reporting standards). This is because they are no longer expected to be developed within the next five years. As of March 31, 2012, Newfield generated latest 12 months (LTM) EBITDAX of $1.76 billion which resulted in interest coverage of 9.44x and leverage of 1.66x as measured by debt-to-EBITDAX. Free cash flow (FCF; cash flow from operations less capital expenditures) was negative $850 million during the LTM. Given expectations for production and capital spending, Fitch expects Newfield to remain modestly FCF negative in 2012. However, asset sales may provide a source to fund this deficit without increasing debt levels. Liquidity remains adequate and stems from cash balances ($27 million on March 31, 2012), Newfield's $1.25 billion senior unsecured credit facility (maturing in June 2016) and from operating cash flows ($1.49 billion for the LTM period ending March 31, 2012). Newfield had full availability under its credit facility at March 31, 2012. Funds were drawn to tender for $325 million of 2014 notes in April. As of June 8, 2012 Newfield had approximately $531.5 million of borrowings under its credit facility, leaving available capacity of approximately $903.5 million. Following the expected new issuance and tender for 2016 notes, Newfield should again have near full availability under the facility. The next note maturity will be $600 million of subordinated notes due in 2018. Newfield also maintains a significant amount of commodity hedges. This reduces Newfield's exposure to short-term commodity price volatility which continue to support operating cash flow levels. Key covenants are primarily associated with the senior unsecured credit facility and include maximum debt-to-book capitalization (60% covenant threshold), and minimum EBITDAX-to-interest expense (3.50 covenant level), which both had ample headroom at March 31, 2012. Fitch notes that when Newfield refinanced its credit facility in June 2011 an NPV-to-debt covenant was dropped. This covenant had only counted 50% of the principal amount of senior subordinated notes in its calculation. The removal of this covenant removed the key incentive for Newfield to issue subordinated notes. It is also important to note that a future upgrade of Newfield's ratings would likely entail a continued one-notch differential between its senior unsecured and senior subordinated note ratings. Future debt offerings for Newfield are likely to be senior unsecured note offerings, which would reinforce the one-notch rating differential. Fitch currently rates Newfield as follows: --Long-term IDR 'BB+'; --Senior unsecured bank facility 'BB+'; --Senior unsecured notes 'BB+'; --Senior subordinated notes 'BB'. The Rating Outlook is Stable. Additional information is available at 'www.fitchratings.com' Applicable Criteria and Relevant Research: --'Corporate Rating Methodology' (Aug. 12, 2011); --'Rating Oil and Gas Exploration and Production Companies: Sector Credit Factors' (August 5, 2011); --'Statistical Review of US E&P Companies' (May 10, 2012); --'Updating Fitch's Oil and Gas Price Deck' (Feb. 6, 2012); --'Dividend Policy in the Energy Sector: Low Oil Prices Could Create Cash Flow Stress' (Feb 29, 2012). Applicable Criteria and Related Research: Rating Oil and Gas Exploration and Production Companies Corporate Rating Methodology Statistical Review of U.S. E&P Companies Updating Fitch's Oil & Gas Price Deck -- Midyear Update Dividend Policy in the Energy Sector -- Low Oil Prices Could Create Cash Flow Stress