Nov 28 - Fitch Ratings has downgraded Apache Corporation's (NYSE: APA) Long-Term Issuer Default Rating (IDR) and senior unsecured ratings from 'A-' to 'BBB+' following the company's announced issuance of senior unsecured notes. Net proceeds from the issuance will be used to repay commercial paper (CP) borrowings and for general corporate purposes. The notes will rank pari passu with Apache's other existing senior unsecured obligations. Apache's Ratings Outlook has been revised from Negative to Stable.
Fitch downgrades Apache Corporation's ratings as follows:
--Long-Term IDR to 'BBB+' from 'A-';
--Senior unsecured credit facility to 'BBB+' from 'A-';
--Senior unsecured notes to 'BBB+' from 'A-';
--Preferreds to 'BBB' from 'BBB+'.
Fitch has also affirmed the following ratings:
--Commercial paper at 'F2';
--Short-term IDR at 'F2'.
The main driver for the downgrade is the trend of higher debt levels Apache is carrying. At Sept. 30, 2012, the company's debt rose to $11.63 billion ($12.25 billion including 50% equity credit for the company's mandatory convertible preferreds), versus total balance sheet debt of $7.22 billion in 2011 and $5.07 billion in 2009.
As calculated by Fitch, growth in Apache's debt has outpaced growth in underlying reserves and production over the last several years, resulting in balance sheet debt/boe proven developed (PD) reserves of approximately $5.89/boe at Sept. 30, 2012--up sharply from $3.62/boe in 2011 and more than double the levels seen in 2008. Similarly, balance sheet debt/boe proven (1p) reserves and balance sheet debt/flowing barrel are up significantly at $3.89/boe and $15,022/barrel, versus levels of $2.41/boe and $9,646/barrel in 2011, respectively. As a result of higher debt levels, Apache's credit metrics have weakened relative to a number of independent E&P peers.
Apache's ratings are supported by the company's size, diversified portfolio of upstream properties, significant leverage to liquids (just over 50% of the company's 770,783 boepd of third quarter production was liquids, mostly oil rather than lower priced NGLs), substantial exposure to higher-priced Brent and Brent-linked crudes within its oil portfolio, historical track record of strong growth in reserves and production at economical replacement costs, and meaningful capex flexibility. While outside the company's control, persistently high oil prices (average WTI of approximately $95/barrel and Brent of $112/barrel in 2012) have also been a strong credit positive.
Recent latest-twelve-month (LTM) financial metrics are good, and include balance sheet debt/EBITDA of 0.99 times (x) (versus 0.62x at YE 2011), FFO interest coverage of 18.6x (versus 21.3x at YE 2011), and free cash flow of $60 million (versus $2.57 billion at YE 2011). Looking forward, Fitch believes Apache will be moderately free cash flow (FCF) negative in 2013.
Increased Acquisition Activity
The company's Outlook was revised to Negative in January due to the leveraging impact of the $2.85 billion Cordillera Energy Partners III acquisition, which had a large debt financing component (79%), and was relatively low on proven reserves. The Cordillera acquisition follows a spate of recent acquisitions by Apache including the ExxonMobil North Sea deal ($1.25 billion); BP Permian, Canada, and Egypt properties acquisition ($6.4 billion); Devon GoM Shelf acquisition ($1.05 billion); and the Mariner Energy acquisition ($4.4 billion).
High Capex a Concern
With regards to future capex pressure, Fitch would note that the company's LNG projects (the Chevron-operated Wheatstone facility in Australia, and the Apache-operated Kitimat, B.C. export facility) may create funding pressures over an extended time frame given the long lag between the initial investment and cash flows as well as the potential for cost overruns. With regards to Wheatstone, final investment decision (FID) was reached by operator Chevron and partners in 2011. Apache's share of spending for its 13% stake is approximately $4 billion. However, initial cash flows from the facility are not expected until 2016. No FID has been made with regards to Kitimat which makes its status less certain, but if that project goes ahead, Fitch expects similar or higher capex requirements given its size and remote location.
Because of their ratable nature, the LNG facilities should lower Apache's overall cash flow volatility once up and running. However, in the interim, credit metrics could be challenged as a sponsor must lean on the remainder of its portfolio to produce supporting cash flows. Given the large backlog of investment opportunities created by Apache's spate of acquisitions, as well as the unique issues created by its current and future potential LNG investments, capex pressures on the company may be significant over the near to medium term.
At Sept. 30, 2012, Apache's liquidity was adequate. CP balances were $1.8 billion, leaving approximately $1.51 billion, or 46% of availability on its $3.3 billion in committed unsecured revolver capacity. Of this, $1.0 billion in capacity matures in August 2016, and the remaining $2.3 billion matures in June 2017. All revolvers are U.S. dollar denominated facilities which can be used to backstop Apache's $3.0 billion CP program. Near-term maturities are moderate and include $900 million due in 2013 ($500 million in 5.25% notes and $400 million in 6.00%), $350 million due 2015, and the next maturity due in 2017. Covenant restrictions across Apache's debt instruments are light and include a 60% debt-to-capitalization maximum across its unsecured revolvers, as well as limitations on sale leasebacks and change of control provisions.
Apache's other obligations are manageable. The deficit on pension benefit plans at year-end 2011 was just $5 million. The company's Asset Retirement Obligation (ARO) rose to $4.23 billion at the end of the third quarter, versus $3.89 billion seen at year-end (YE) 2011 and more than double the $1.78 billion seen in 2009. Accrued environmental reserves at the end of the third quarter were $102 million. Commodity derivatives exposure is limited as the company's policy is to keep its output exposed to the spot market prices. The company had a net commodity derivative asset of just $59 million at Sept. 30, 2012. Apache continues to have meaningful exposure to Egypt, although this should decline on a percentage basis following the impact of recent acquisitions.
Positive: Future developments that could lead to positive rating actions include:
--Sustained improvement in debt/boe metrics achieved through debt reductions and/or growth in reserves and production; or other credit supportive actions.
Negative: Future developments that could lead to negative rating action include:
--Significant additional leverage added to the balance sheet stemming from expansions in capex; a large leveraging transaction or transactions; or debt-funded share buybacks;
---A sustained collapse in oil prices without offsetting adjustments;
--A major operational issue or reserve impairment.