TEXT-Fitch rates Pioneer Natural Resources' notes 'BB+'
June 21 - Fitch Ratings has assigned a 'BB+' rating to Pioneer Natural Resources Company's (Pioneer; NYSE:PXD) issuance of $600 million in unsecured notes due July 15, 2022. The net proceeds are intended to repay a portion of the amount currently outstanding under the company's senior unsecured revolving credit facility. At June 15, 2012, borrowings under the $1.25 billion credit facility were $821 million, up from $67 million at March 31, and cash on balance sheet was $261, down from $317 million at March 31. Increases are explained by capital spending, the funding of the $297 million sand plant acquisition, and the general trend that the mid-month balance typically declines by month end because proceeds from commodity sales are received during the second half of each month. Pioneer's Rating Outlook remains Positive. A complete list of ratings follows at the end of this release. Current maturities are minimal; however, the company may be required to purchase (or may choose to call) the $479.9 million of 2.875% convertible senior notes on January 15, 2013. Alternatively note holders may convert the notes during any calendar quarter if the closing price of the Common Stock for at least 20 of the last 30 trading days during the immediately previous quarter is more than 130% of the Base Conversion Price ($72.60 per share, which is equivalent to an initial base conversion rate of 13.7741 common shares per $1,000 principal amount of convertible notes). In general, upon conversion of a note, the holder of such note will receive cash equal to the principal amount of the note and the Company's common stock for the note's conversion value in excess of such principal amount. Reestablishing availability under the revolving credit facility will improve liquidity to meet the potential call on cash from the converts. The next note maturity following other than the converts is $455.3 million of senior notes due 2016. The revolving credit facility also matures in 2016. All of Pioneer's borrowings have covenants, with the most restrictive covenants being associated with the company's senior unsecured credit facility, which contains a total debt-to-book capitalization maximum of 60%. Pioneer's ratings are supported by the company's long-lived onshore reserve base, strong recent operating performance, and the expiration of volumetric production payments (VPPs). Concerns include an increasing capital spending program (current guidance of $2.8 billion in 2012 versus $2.4 billion in 2011) and the potential for Pioneer's balance sheet to come under pressure if capex were increased or in a sustained lower oil price scenario. The Positive Outlook reflects the positive production outlook, continued cash flow and liquidity support stemming from the company's very sizable hedging program, and the company's demonstrated willingness to protect its balance sheet by issuing equity. Looking forward, Fitch expects Pioneer to benefit from existing hedges, increasing production levels and VPP amortizations. Capital expenditures are increasing rapidly based on recent drilling success and acceleration in the Horizontal Wolfcamp Shale. Also, the capital expenditure carry provided by Reliance in the Eagle Ford Shale joint venture is expected to run out at the end of 2012. Accordingly, Fitch expects Pioneer to be significantly free cash flow negative in 2012 (including the recent $297 million acquisition of Carmeuse Industrial Sands). This is partially a result of working to reinvest the proceeds from the company's fourth quarter $500 million equity issuance. Volumes hedged as of April 30, 2012 are approximately 90% of oil (65% of total liquids) and 90% of natural gas for the remainder of 2012, 85% of oil and 65% of natural gas in 2013, and 40% of oil and 55% of natural gas in 2014. While production growth and hedges should support cash flows to fund capex in a lower oil price scenario, it is important to note that most of the company's oil hedges are three way collars that will not provide support until WTI prices fall below approximately $85 per barrel in 2012 ($90 per barrel in 2013 and beyond). Fitch would expect beyond 2012 that Pioneer would be at least FCF neutral, or if negative that funding deficits would be covered by asset sales or equity issuances. Fitch currently rates Pioneer as follows: --Long-term IDR 'BB+'; --Senior unsecured bank facility 'BB+'; --Senior unsecured notes 'BB+'. The Rating Outlook is Positive. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Relevant Research: --'Corporate Rating Methodology' (Aug. 12, 2011); --'Rating Oil and Gas Exploration and Production Companies: Sector Credit Factors' (Aug. 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: Corporate Rating Methodology Rating Oil and Gas Exploration and Production Companies Statistical Review of U.S. E&P Companies Updating Fitch's Oil and Gas Price Deck Dividend Policy in the Energy Sector -- Low Oil Prices Could Create Cash Flow Stress