May 24 - Fitch Ratings has revised Newfield Exploration Company's
(Newfield) Rating Outlook to Stable from Positive. In addition, Fitch affirmed
Newfield's Issuer Default Rating (IDR) at 'BB+' and the rating on the company's
senior subordinated notes at 'BB'. A full list of ratings is included at the end
of this release.
The return to a Stable Outlook reflects the timing and challenges of the
company's transition from being primarily a natural gas producer to being an oil
focused company. Debt/PD (proved developed reserves) has increased to $8.23/boe
(barrels of oil equivalent), calculated using debt balances as of March 31, 2012
and reserves as of December 31, 2011. This is well above levels Fitch had
formerly noted as being in line with a potential upgrade ($7.00/boe). This is
largely due to a decrease in proved developed natural gas reserves. These
Debt/PD calculations include an adjustment adding asset retirement obligations
(AROs) to balance sheet debt levels.
Reserve growth for 2011 was driven by undeveloped bookings in the Williston
(Bakken) and Monument Butte (Uinta) fields (72 mmboe out of 143 mmboe in total
organic adds). Gains were partially offset by the reclassification of 15 mmboe
of natural gas from proved undeveloped reserves to probable reserves, as
required by SEC reporting standards, because they are no longer expected to be
developed within the next five years.
The rating reflects the company's relatively conservative financial profile.
While management has stated it is willing to borrow to finance acquisitions,
Fitch would expect acquisitions to be relatively small and also to be financed
with divestitures of non-core related assets as the company focuses on
continually high-grading its asset base.
Credit metrics continued to improve as of March 31, 2012 as Newfield generated
latest 12 months (LTM) EBITDAX of $1.76 billion which resulted in interest
coverage of 9.44x and leverage of 1.66x as measured by debt-to-EBITDAX.
Free cash flow (FCF; cash flow from operations less capital expenditures) was
negative $850 million during the LTM. Given expectations for production and
capital spending, Fitch expects Newfield to remain modestly FCF negative in
2012. However, asset sales may provide a source to fund this deficit without
increasing debt levels.
Liquidity remains strong and stems from cash balances ($27 million on March 31,
2012), full availability under the company's $1.25 billion senior unsecured
credit facility (maturing in June 2016) and from operating cash flows ($1.49
billion for the LTM period ending March 31, 2012). These numbers are before the
April 30, 2012 redemption of $325 million of senior subordinated notes funded
primarily through use of the company's credit facility. Following this
redemption, the company's next debt maturities include the senior unsecured
credit facility and $550 million of senior subordinated notes, both due in 2016.
Newfield also maintains a significant amount of commodity hedges reducing the
company's exposure to short-term commodity price volatility which continue to
support operating cash flow levels.
Key covenants are primarily associated with the senior unsecured credit facility
and include maximum debt-to-book capitalization (60% covenant threshold), and
minimum EBITDAX-to-interest expense (3.50 covenant level), which both had ample
headroom at March 31, 2012.
It is noteworthy that when Newfield refinanced its credit facility in June 2011
an NPV-to-debt covenant was dropped. This covenant had only counted 50% of the
principal amount of senior subordinated notes in its calculation. The removal of
this covenant removed the key incentive for the company to issue subordinated
It is also important to note that a future upgrade of the company's ratings
would likely entail a continued one-notch differential between the company's
senior unsecured and senior subordinated note ratings. Future debt offerings for
the company are likely to be senior unsecured note offerings, which would
reinforce the one-notch rating differential.
Fitch has affirmed the following ratings for Newfield:
--IDR at 'BB+';
--Senior unsecured bank facility at 'BB+';
--Senior subordinated notes at 'BB'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Relevant Research:
--'Methodology' (Aug. 16, 2010);
--'Rating Oil and Gas Exploration and Production Companies: Sector Credit
Factors' (April 6, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Oil and Gas Exploration and Production Companies