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.
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that could lead to positive rating actions
--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.