Fitch Affirms Devon Energy Corp's L-T IDR at 'BBB+'; Outlook Stable
CHICAGO -- November 08, 2012
Fitch Ratings has taken the following rating actions on Devon Energy
Corporation (Devon; NYSE: DVN) and its subsidiaries:
Devon Energy Corporation
--Long-term Issuer Default Rating (IDR) affirmed at 'BBB+';
--Senior unsecured notes affirmed at 'BBB+';
--Senior unsecured credit facility affirmed at 'BBB+';
--Short-term IDR affirmed at 'F2';
--Commercial paper (CP) affirmed at 'F2'.
Devon Financing Corporation U.L.C.
--Long-term IDR of 'BBB+' assigned;
--Senior unsecured notes affirmed at 'BBB+'.
--Long-term IDR of 'BBB' assigned;
--Senior unsecured notes affirmed at 'BBB'.
The Rating Outlook for Devon remains Stable.
Devon's ratings reflect the company's large, low cost proven reserve base in
North America, sizable and growing production, hedging program, and
conservative financial strategy. Devon's proved reserve base is roughly 3
billion barrels of oil equivalent (boe) split approximately 58% natural gas
and 42% liquids. The proved developed (PD) component of the proven reserve
base is 74%. In the third quarter of 2012, Devon's production was
approximately 678,000 boe/d and is expected to be roughly flat in the fourth
quarter, while growing modestly next year.
Given the combination of lingering weakness in gas prices and higher debt
levels, Devon has experienced modest deterioration in credit metrics over the
LTM period. As calculated by Fitch, Devon's gross debt climbed to $11.24
billion at 9/30/2012 from $9.78 billion at YE 2011, and EBITDA edged down to
$5.55 billion from $6.38 billion seen at year end, resulting in debt/EBITDA of
2.0 times (x) and EBITDA/interest expense of 12.8x, versus 1.53x and 15.07x
respectively at YE 2011. The company's gross debt of $11.2 billion at
September 30, 2012 consisted of senior unsecured notes of nearly $8.5 billion,
and approximately $2.8 billion of commercial paper outstanding.
Devon also possesses approximately $7.5 billion in cash and marketable
securities that resulted largely from its international divestiture program
over the several quarters. At this time, nearly this entire amount resides
offshore awaiting potential changes to tax repatriation law in the U.S.
Using Sept. 30, 2012 debt balances and 2011 reserves, Fitch calculates reserve
based leverage metrics that result in a debt to PD ratio of approximately
$5.06/boe. Debt to flowing barrel of production for the third quarter is
$16,555/boe per day.
Largely as a result of growth oriented spending, Devon has been free cash flow
negative in the LTM period by about $2.7 billion (after dividends, before
asset sale proceeds). Better expected price realizations, hedges on
approximately 40% of expected natural gas volumes and 50% of oil volumes, and
moderated capital expenditures are expected to reduce the cash burn in 2013.
However, Fitch still expects Devon to be modestly free cash flow negative
under our base case price deck ($80 West Texas Intermediate oil and $3.50
Henry Hub natural gas for 2013).
Liquidity is provided by the aforementioned cash on hand and marketable
securities, cash flow from operations and as of Oct. 24, 2012, $2.9 billion of
availability under the company's new $3 billion unsecured credit facility due
Oct. 24, 2017 (which replaced the former $2.19 billion facility expiring April
The facility contains only one material financial covenant, which requires
Devon's ratio of total funded debt to total capitalization to be less than
65%. As of Sept. 30, 2012, Devon had ample headroom under this covenant, with
total debt to capitalization of 24.7%. Near-term maturities other than
commercial paper balances are relatively light and include $500 million of
5.625% unsecured notes due Jan. 15, 2014 and $500 million of unsecured notes
due July 15, 2016.
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
--Continued robust reserve replacement rates at competitive F&D costs;
--A commitment from management to maintain a robust financial profile
throughout industry cycles including lower gross leverage and consistent
positive free cash flow.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
--Significantly leveraging share repurchase activity or major dividend
--A leveraging acquisition, or failure to moderate capital spending levels in
2013 if commodity pricing does not improve;
--A spinoff of midstream operations without a corresponding reduction in debt;
-- A large disappointment in 2012 reserves or material production and
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 Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Oil and Gas Exploration and Production Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Oil and Gas Production Companies
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Daniel Harris, +1 312-368-3217
70 West Madison Street
Chicago, IL 60602
Mark C. Sadeghian, CFA, +1 312-368-2090
Stephen Brown, +1 312-368-3139
Brian Bertsch, +1 212-908-0549 (New York)
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