June 19 - Fitch Ratings has assigned a 'BB+' rating to Newfield Exploration
Company's (Newfield; NYSE:NFX) expected issuance of unsecured notes due
2024. The net proceeds are intended to fund the purchase of up to $550 million
in principal amount of the 2016 notes. Proceeds will also be used to repay a
portion of the borrowings outstanding under the revolving credit facility, which
were drawn to fund the redemption of the 6 5/8% senior subordinated notes due
2014. Newfield's Rating Outlook remains Stable. A complete list of ratings is
provided at the end of this release.
The ratings reflect Newfield'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. Additionally, Fitch expects
Newfield to finance its acquisitions with divestitures of non-core related
assets as the company focuses on high-grading its asset base.
The Stable Outlook reflects solid liquidity and operating momentum from liquids
production growth. This contrasted with the timing and challenge of Newfield's
transition from being primarily a natural gas producer to being an oil focused
Reserve growth for 2011 was driven by undeveloped bookings in the Williston
(Bakken) and Monument Butte (Uinta) fields (72 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). This is because they are no longer expected to be
developed within the next five years.
As of March 31, 2012, 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 adequate and stems from cash balances ($27 million on March
31, 2012), Newfield'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).
Newfield had full availability under its credit facility at March 31, 2012.
Funds were drawn to tender for $325 million of 2014 notes in April. As of June
8, 2012 Newfield had approximately $531.5 million of borrowings under its credit
facility, leaving available capacity of approximately $903.5 million. Following
the expected new issuance and tender for 2016 notes, Newfield should again have
near full availability under the facility. The next note maturity will be $600
million of subordinated notes due in 2018. Newfield also maintains a significant
amount of commodity hedges. This reduces Newfield'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.
Fitch notes 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 Newfield to issue subordinated
It is also important to note that a future upgrade of Newfield's ratings would
likely entail a continued one-notch differential between its senior unsecured
and senior subordinated note ratings. Future debt offerings for Newfield are
likely to be senior unsecured note offerings, which would reinforce the
one-notch rating differential.
Fitch currently rates Newfield as follows:
--Long-term IDR 'BB+';
--Senior unsecured bank facility 'BB+';
--Senior unsecured notes 'BB+';
--Senior subordinated notes 'BB'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Rating Oil and Gas Exploration and Production Companies: Sector Credit
Factors' (August 5, 2011);
--'Statistical Review of US E&P Companies' (May 10, 2012);
--'Updating Fitch's Oil and Gas Price Deck' (Feb. 6, 2012);
--'Dividend Policy in the Energy Sector: Low Oil Prices Could Create Cash Flow
Stress' (Feb 29, 2012).
Applicable Criteria and Related Research:
Rating Oil and Gas Exploration and Production Companies
Corporate Rating Methodology
Statistical Review of U.S. E&P Companies
Updating Fitch's Oil & Gas Price Deck -- Midyear Update
Dividend Policy in the Energy Sector -- Low Oil Prices Could Create Cash Flow