May 24, 2012 / 8:10 PM / 5 years ago

TEXT-S&P revises Anadarko Petroleum Corp outlook

     -- U.S. independent exploration and production (E&P) company Anadarko 	
Petroleum is on track to delever following its $4 billion Macondo-related 	
settlement with BP.	
     -- We are revising the outlook to positive from stable and affirming the 	
'BBB-' corporate credit rating.	
     -- The positive outlook reflects our expectation that credit protection 	
measures will improve over the next 12 months.	
Rating Action	
On May 24, 2012, Standard & Poor's Ratings Services revised its outlook on The 	
Woodlands, Texas-based E&P company Anadarko Petroleum to positive from stable. 	
We also affirmed the 'BBB-' corporate credit rating.	
We believe Anadarko is on track to substantially delever following its 	
fourth-quarter $4 billion cash settlement with BP (A/Stable/A-1) regarding 	
Macondo-related liabilities. The payment was funded with debt and cash on 	
hand, and pushed Anadarko's funds from operations to debt ratio below 20% at 	
year-end 2011. We estimate Anadarko's funds from operations (FFO)/debt will 	
improve to above 40% at year-end 2012 and to nearly 45% at year-end 2013, with 	
the increase primarily caused by 10% to 15% year-over-year oil and natural gas 	
liquids production growth as well as a more favorable profits tax regime in 	
However, we are holding off raising the rating today given the uncertainty 	
surrounding an ongoing lawsuit, and the potential for a substantial cash 	
payment, as well as headline risk. Former Kerr McGee subsidiary Tronox Inc. is 	
suing Anadarko for actual and constructive fraudulent conveyance. (Kerr McGee 	
was acquired by Anadarko in 2006). Tronox alleges that it was insolvent or 	
undercapitalized at the time it was spun off from Kerr McGee (in 2006) and its 	
seeking to recover damages in excess of $15 billion. The suit went to trial on 	
May 15, 2012, in New York, and could conclude as soon as the end of August. 	
Outstanding environmental claims against Tronox by the U.S. government will be 	
settled out of any potential settlement with Anadarko. Anadarko has taken $525 	
million in contingent settlement charges, and while we currently believe that 	
is a fair estimate, there is the risk of a much higher figure. 	
The ratings on Anadarko Petroleum reflect our assessment of the company's 	
"strong" business risk and "significant" financial risk. We view Anadarko's 	
business risk profile as strong, based on the company's large proven reserve 	
base, good product and geographic diversity (with strategic positions and 	
exploration potential in the Rockies, Eagle Ford Shale, Permian Basin, 	
Appalachia, Algeria, offshore West Africa, and offshore Mozambique), and a 	
deep inventory of drilling locations that should allow for multiyear 	
production growth. As of Dec. 31, 2011, Anadarko's proven reserves totaled 2.5 	
billion barrels of oil equivalent (boe), 45% oil and NGLs, and 71% developed. 	
Daily production averaged 680,000 barrels of oil equivalent (boe) in 2011, 	
which results in a reserve life of about 10 years. Anadarko also maintains a 	
43% limited partner and 2% general partner interest in Western Gas Partners 	
L.P. (BB+/Positive/--), a midstream-focused master limited partnership that 	
has assets which primarily support Anadarko's exploration and production (E&P) 	
Anadarko has good organic production growth prospects for a company of its 	
size, with the company guiding to 3% to 5% growth in 2012, 8% in 2013, and 5% 	
to 7% per year thereafter (with upside to these figures if natural gas prices 	
recover). Oil and liquids as a percentage of total production is set to 	
increase to 50% in 2013 from 43% in 2011. While onshore North American 	
production provides a solid base, the company also has several mega-projects 	
under development in its portfolio (El Merk in Algeria, Lucius in the Gulf of 	
Mexico, and the TEN project offshore Ghana), that will add significant volumes 	
over the next few years. Longer-term, the company should replenish its project 	
inventory via exploration drilling programs in the deepwater Gulf of Mexico 	
and internationally.	
We view Anadarko's financial risk profile as significant. As of Dec. 31, 2011, 	
the company had $19.9 billion of adjusted debt, which includes our standard 	
adjustments related to operating leases, asset retirement obligations, and 	
postretirement benefit obligations. At year-end 2011, FFO/debt was 19%, which 	
is low for the current rating, partly as a result of the cash settlement with 	
BP. However, based on Standard & Poor's oil and natural gas pricing 	
assumptions of $85/bbl and $2.00/mmbtu, respectively, in 2012, and $80/bbl and 	
$2.75/mmbtu in 2013, and our projections of 4% production growth in 2012 and 	
5% in 2013, we estimate Anadarko's FFO/debt will improve to 40% by the end of 	
2012 and to nearly 45% by the end of 2013.	
We view Anadarko's liquidity as "strong". Key expectations and assumptions in 	
our liquidity profile include:	
     -- As of March 31, 2012, Anadarko had cash on hand of $2.9 billion and 	
$2.1 billion available on its $5.0 billion senior secured credit facility 	
maturing in 2015. 	
     -- We expect Anadarko to remain in compliance with the facility's 	
financial covenants, which require the company to maintain a consolidated 	
leverage ratio of less than 4.5x, a current ratio of at least 1.0x, and a 	
collateral coverage ratio of at least 1.75x.	
     -- We expect the company to maintain a cash balance of at least $1.0 	
billion to cover working capital needs.	
     -- We project Anadarko will generate $7.5 billion of FFO this year (under 	
our price deck assumptions), which should more than cover its $7.2 billion 	
capital expenditure budget (including Western Gas Partners). 	
     -- In the fourth quarter of 2011, Anadarko paid out $4 billion in a cash 	
settlement to BP (funded by cash on hand and drawing down on its credit 	
     -- We currently assume the company will pay out about $525 million 	
relating to a Tronox settlement in 2012.	
     -- Over the course of the next 12 months, the company will receive an 	
incremental $1.8 billion from oil sales in Algeria following the resolution of 	
a profits tax dispute. We assume $1.0 billion is received in 2012 and $800 	
million in 2013.	
     -- We expect the company will pay out about $250 million in dividends in 	
     -- Anadarko has indicated that it intends to sell assets in Brazil and 	
Indonesia, which would be incremental sources of liquidity.	
The positive outlook reflects our expectation that the company will continue 	
to delever following its recent $4 billion Macondo-related settlement with BP, 	
such that FFO/debt reaches 40% at year-end 2012 and approaches 45% at year-end 	
2013. We could raise ratings following a reasonable resolution of the Tronox 	
lawsuit, the trial for which is ongoing and could conclude at the end of 	
August. Based on our current 2012 and 2013 FFO projections, we estimate that 	
the company could absorb up to a $3 billion increase in debt and still 	
maintain FFO/debt in the 35% to 40% range, which would be sufficient for an 	
upgrade given the company's strong business risk profile. We would consider 	
revising the outlook to stable if FFO/debt falls to the 25% to 30% level, 	
which would most likely occur in the event of a larger Tronox settlement, a 	
large debt-financed acquisition, or a more aggressive capital spending plan.  	
Related Criteria And Research	
     -- Standard & Poor's Lowers Its U.S. Natural Gas Price Assumptions; Oil 	
Price Assumptions Are Unchanged, April 18, 2012 	
     -- Standard & Poor's Raises Its Oil Price Assumptions; Natural Gas Price 	
Assumptions Unchanged, March 22, 2012 	
     -- Key Credit Factors: Global Criteria For Rating The Oil And Gas 	
Exploration And Production Industry, Jan. 20, 2012 	
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 	
May 27, 2009 	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
Ratings List	
Ratings Affirmed; Outlook Revised To Positive	
                                        To                 From	
Anadarko Petroleum Corp.	
Kerr-McGee Corp.	
Westport Resources Corp.	
 Corporate Credit Rating                BBB-/Positive/--   BBB-/Stable/--	
Ratings Affirmed	
Anadarko Petroleum Corp.	
 Senior Unsecured                       BBB-               	
 Preferred Stock                        BB                 	
Anadarko Finance Co.	
Kerr-McGee Corp.	
 Senior Unsecured                       BBB-               	
Union Pacific Resources Group Inc.	
 Senior Unsecured                       BBB-               	
Westport Resources Corp.	
 Preferred Stock                        BB

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