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.
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.
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
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.
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
-- There are no significant near-term debt maturities (principal
maturities of about $19 million in the second half of 2012 and $190 million in
-- 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
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.
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 Affirmed; Outlook Action
Pacific Rubiales Energy Corp.
Corporate Credit Rating BB/Positive/-- BB/Stable/--
Pacific Rubiales Energy Corp.
Senior Unsecured BB
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