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TEXT-S&P revises Pacific Rubiales Energy outlook to positive
July 13 - Overview -- Toronto-based oil and gas producer Pacific Rubiales Energy Corp.'s oil and gas production and reserves continue to improve. -- We are revising the outlook to positive from stable. -- At the same time, we are affirming our 'BB' corporate and senior unsecured debt ratings on the company. -- The positive outlook indicates that we could raise the ratings by one notch if the company continues to strengthen its operating performance. Rating Action On July 13, 2012, Standard & Poor's Ratings Services revised the outlook on Pacific Rubiales Energy Corp. (PRE) to positive from stable. At the same time, we affirmed the company's 'BB' corporate credit rating and its 'BB' senior unsecured debt rating. Rationale The outlook revision is primarily based on the company's continued increase in production volume and reserves, and its maintenance of a strong financial performance. As of March 31, 2012, the company's revenues doubled that of the same period of 2011, reaching $3.7 billion. The company's credit metrics continue to improve, with debt to EBITDA and funds from operations (FFO) to debt of 0.6x and 121.6% as of March 31, 2012, respectively, compared with 0.9x and 83.1% a year ago. The ratings on PRE reflect our view of a "fair" business profile, given the company's short track record and heavy concentration in Colombia. Pacific Rubiales is an exploration and production (E&P) company in Colombia, with a total participation of about 22% in terms of gross production, though it is growing compared with other regional players. Recent and expected strong development in production and reserves, "strong" liquidity, an experienced management team, and a "significant" financial risk profile also support the rating. Pacific Rubiales produces heavy crude oil and natural gas. We expect the company's increase in production to come mainly from Quifa, Sabanero, CPE-6. We also expect its recent acquisitions (BPZ, and PMD- PetroMagdalena) to reach about 100,000 boe/d (barrels of oil equivalent per day) at the end of the year. During the first quarter of 2012, it had an average net production after royalties of approximately 94,000 boe/d, with working interests in 43 blocks: 37 in Colombia, two in Guatemala, and four in Peru. The company has significantly increased its production volume, based on the continuous growth in the production of heavy oil in its fields. The company's production is concentrated in the Rubiales/Piriri, Quifa, and La Creciente fields, all of which produce heavy oil, requiring the company to incur additional costs by purchasing diluents in the market. The production at the Quifa field rose sharply in 2011 because of the development of several wells in the block. We assess the company's financial profile as significant. Our adjusted debt includes asset retirement obligations, operating leases, the company's ship-or-pay obligation to guarantee full payment on its Oleoducto de los Llanos (ODL) and Bicentenario loans, and the proportion of convertible unsecured subordinated debentures classified as equity. In 2012 and 2013, based on our assumptions for crude oil prices, we expect the company to generate FFO to debt of about 130% and 160%, respectively, and to continue funding its capital expenditures with internally generated funds. For the 12 months ended March 31, 2012, PRE posted EBITDA interest coverage of 24.5x, which compared favorably with and 11.9x for the same period of 2011. Liquidity We assess the company's liquidity as strong. Our liquidity assessment is based on the following assumptions: -- We expect PRE's liquidity resources (including cash, FFO, and credit facility availability) to exceed uses by 1.6x over the next 12 months. -- PRE has proven good access to financial markets by equity private and public placements. -- There are no significant near-term debt maturities (principal maturities of about $19 million in the second half of 2012 and $190 million in 2013). -- We believe the company's resources can more than cover its needs for the foreseeable future, even if EBITDA declines by 30%. Despite its large capital expenditures, the company has generated free operating cash flow--$211.6 million as of March 31, 2012. We expect PRE to continue generating discretionary cash flow, despite its expansion program and dividend distributions. As of March 31, 2012, the company had a cash position of $969.5 million, which compares favorably with debt maturities of $19.2 million for the next 12 months. Moreover, the company has a committed revolver credit facility of $350 million due in 2013, of which it has available $157 million. PRE's covenant headroom was ample as of the first quarter of 2012. In 2012 and 2013, we expect the company to maintain an approximately 88% EBITDA cushion against the consolidated leverage ratio covenant of 3.5x and the interest coverage ratio covenant of 2.50x. Outlook The positive outlook indicates that we could raise the ratings by one notch if the company continues to strengthen its operating performance by developing its reserve base further, implementing its growth strategy successfully, and fully integrating its new acquisitions in the next 12 to 18 months. It would have to also maintain its current financial profile. We could revise the outlook to stable if Pacific Rubiales' production increases are lower than we expect (about 100,000 boe/d at the end of the year) or if recent acquisitions do not materialize in the next two to three years. Related Criteria And Research -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Global Criteria For Rating The Oil And Gas Exploration And Production Industry, Jan. 20, 2012 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; Outlook Action To From Pacific Rubiales Energy Corp. Corporate Credit Rating BB/Positive/-- BB/Stable/-- Ratings Affirmed Pacific Rubiales Energy Corp. Senior Unsecured BB Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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